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 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) is an Auto-Tires-Trucks stock that has seen a price change of -18.46% so far this year. 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%.
In terms of dividend growth, the company's current annualized dividend of $4.56 is up 8.3% from last year. Over the last 5 years, Cummins has increased its dividend 5 times on a year-over-year basis for an average annual increase of 14.06%. Looking ahead, future dividend growth will be dependent on earnings growth and payout ratio, which is the proportion of a company's annual earnings per share that it pays out as a dividend. Right now, Cummins's payout ratio is 33%, which means it paid out 33% of its trailing 12-month EPS as dividend.
Looking at this fiscal year, CMI expects solid earnings growth. The Zacks Consensus Estimate for 2018 is $13.27 per share, with earnings expected to increase 24.95% from the year ago period.
From greatly improving stock investing profits and reducing overall portfolio risk to providing tax advantages, investors like dividends for a variety of different reasons. However, not all companies offer a quarterly payout.
High-growth firms or tech start-ups, for example, rarely provide their shareholders a dividend, while larger, more established companies that have more secure profits are often seen as the best dividend options. Income investors must be conscious 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).
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.