Getting big returns from financial portfolios, whether through stocks, bonds, ETFs, other securities, or a combination of all, is an investor's dream. However, when you're an income investor, your primary focus is generating consistent cash flow from each of your liquid investments.

While cash flow can come from bond interest or interest from other types of investments, income investors hone in on 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 account for significant portions of long-term returns, with dividend contributions exceeding one-third of total returns in many cases.

Cummins in Focus

Cummins (CMI) is headquartered in Columbus, and is in the Auto-Tires-Trucks sector. The stock has seen a price change of 25.67% since the start of the year. Currently paying a dividend of $1.82 per share, the company has a dividend yield of 2.42%. In comparison, the Automotive - Internal Combustion Engines industry's yield is 1.2%, while the S&P 500's yield is 1.57%.

Looking at dividend growth, the company's current annualized dividend of $7.28 is up 12% 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 6.53%. 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 35%, meaning it paid out 35% of its trailing 12-month EPS as dividend.

CMI is expecting earnings to expand this fiscal year as well. The Zacks Consensus Estimate for 2024 is $19.77 per share, which represents a year-over-year growth rate of 0.41%.

Bottom Line

Investors like dividends for many reasons; they greatly improve stock investing profits, decrease overall portfolio risk, and carry tax advantages, among others. But, not every company offers 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 have to be mindful 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).