Why Cummins (CMI) is a Top Dividend Stock for Your Portfolio

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.

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 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 10.13% so far this year. Currently paying a dividend of $1.35 per share, the company has a dividend yield of 2.16%. In comparison, the Automotive - Internal Combustion Engines industry's yield is 0.72%, while the S&P 500's yield is 1.29%.

In terms of dividend growth, the company's current annualized dividend of $5.40 is up 2.2% 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 7.48%. 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 42%. This means it paid out 42% of its trailing 12-month EPS as dividend.

Earnings growth looks solid for CMI for this fiscal year. The Zacks Consensus Estimate for 2021 is $15.96 per share, representing a year-over-year earnings growth rate of 32.89%.

Bottom Line

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 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 #1 (Strong Buy).

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