Getting big returns from financial portfolios, whether through stocks, bonds, ETFs, other securities, or a combination of all, is an investor's dream. But for income investors, generating consistent cash flow from each of your liquid investments is your primary focus.
Cash flow can come from bond interest, interest from other types of investments, and of course, dividends. A dividend is that coveted distribution of a company's earnings paid out to shareholders, and investors often view it by its dividend yield, a metric that measures the dividend as a percent of the current stock price. Many academic studies show that dividends make up large portions of long-term returns, and in many cases, dividend contributions surpass one-third of total returns.
Cummins in Focus
Based in Columbus, Cummins (CMI - Free Report) is in the Auto-Tires-Trucks sector, and so far this year, shares have seen a price change of -18.46%. The engine maker is currently shelling out a dividend of $1.14 per share, with a dividend yield of 3.17%. This compares to the Automotive - Internal Combustion Engines industry's yield of 1.62% and the S&P 500's yield of 1.76%.
Looking at dividend growth, the company's current annualized dividend of $4.56 is up 8.3% from last year. Cummins has increased its dividend 5 times on a year-over-year basis over the last 5 years for an average annual increase of 14.06%. Any future dividend growth will depend on both earnings growth and the company's payout ratio; a payout ratio is the proportion of a firm's annual earnings per share that it pays out as a dividend. Cummins's current payout ratio is 33%, meaning it paid out 33% of its trailing 12-month EPS as dividend.
CMI is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2018 is $13.27 per share, which represents a year-over-year growth rate of 24.95%.
From greatly improving stock investing profits and reducing overall portfolio risk to providing tax advantages, investors like dividends for a variety of different reasons. But, not every company offers a quarterly payout.
Big, established firms that have more secure profits are often seen as the best dividend options, but it's fairly uncommon to see high-growth businesses or tech start-ups offer their stockholders a dividend. During periods of rising interest rates, income investors must be mindful that high-yielding stocks tend to struggle. That said, they can take comfort from the fact that CMI is not only an attractive dividend play, but is also a compelling investment opportunity with a Zacks Rank of #2 (Buy).