All investors love getting big returns from their portfolio, whether it's through stocks, bonds, ETFs, or other types of securities. 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 make up large portions of long-term returns, and in many cases, dividend contributions surpass one-third of total returns.

Cummins in Focus

Headquartered in Columbus, Cummins (CMI) is an Auto-Tires-Trucks stock that has seen a price change of 35.68% so far this year. Currently paying a dividend of $1.82 per share, the company has a dividend yield of 2.24%. In comparison, the Automotive - Internal Combustion Engines industry's yield is 1.12%, while the S&P 500's yield is 1.49%.

In terms of dividend growth, the company's current annualized dividend of $7.28 is up 12% from last year. In the past five-year period, Cummins has increased its dividend 3 times on a year-over-year basis for an average annual increase of 6.53%. 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 35%, which means it paid out 35% of its trailing 12-month EPS as dividend.

Looking at this fiscal year, CMI expects solid earnings growth. The Zacks Consensus Estimate for 2024 is $19.77 per share, with earnings expected to increase 0.41% from the year ago period.

Bottom Line

Investors like dividends for a variety of different reasons, from tax advantages and decreasing overall portfolio risk to considerably improving stock investing profits. However, not all companies offer 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 must be conscious of the fact that high-yielding stocks tend to struggle during periods of rising interest rates. With that in mind, CMI is a compelling investment opportunity. Not only is it a strong dividend play, but the stock currently sits at a Zacks Rank of 3 (Hold).