Whether it's through stocks, bonds, ETFs, or other types of securities, all investors love seeing their portfolios score big returns. However, when you're an income investor, your primary focus is generating consistent cash flow from each of your liquid investments.
Cash flow can come from bond interest, interest from other types of investments, and of course, dividends. A dividend is the distribution of a company's earnings paid out to shareholders; it's often viewed by its dividend yield, a metric that measures a dividend as a percent of the current stock price. Many academic studies show that dividends account for significant portions of long-term returns, with dividend contributions exceeding one-third of total returns in many cases.
Cummins in Focus
Headquartered in Columbus, Cummins (CMI - Free Report) is an Auto-Tires-Trucks stock that has seen a price change of -16.76% so far this year. Currently paying a dividend of $1.14 per share, the company has a dividend yield of 3.1%. In comparison, the Automotive - Internal Combustion Engines industry's yield is 1.51%, while the S&P 500's yield is 1.8%.
Taking a look at the company's dividend growth, its 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%. Future dividend growth will depend on earnings growth as well as payout ratio, which is the proportion of a company's annual earnings per share that it pays out as a dividend. Cummins's current payout ratio is 33%. This means 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. Income investors have to be mindful of the fact that high-yielding stocks tend to struggle during periods of rising interest rates. That said, they can take comfort from the fact that CMI is not only an attractive dividend play, but also represents a compelling investment opportunity with a Zacks Rank of #2 (Buy).