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.

Cash flow can come from bond interest, interest from other types of investments, and of course, 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

Headquartered in Columbus, Cummins (CMI) is an Auto-Tires-Trucks stock that has seen a price change of 40.05% so far this year. Currently paying a dividend of $1.82 per share, the company has a dividend yield of 2.17%. In comparison, the Automotive - Internal Combustion Engines industry's yield is 1.08%, while the S&P 500's yield is 1.51%.

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 4 times on a year-over-year basis for an average annual increase of 7.11%. 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.

Earnings growth looks solid for CMI for this fiscal year. The Zacks Consensus Estimate for 2024 is $19.96 per share, which represents a year-over-year growth rate of 1.37%.

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. It's important to keep in mind that not all companies provide 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).