Whether it's through stocks, bonds, ETFs, or other types of securities, all investors love seeing their portfolios score big returns. But 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 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 4.28% so far this year. The engine maker is currently shelling out a dividend of $1.82 per share, with a dividend yield of 2%. This compares to the Automotive - Internal Combustion Engines industry's yield of 1.02% and the S&P 500's yield of 1.51%.

In terms of dividend growth, the company's current annualized dividend of $7.28 is up 4% 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 7.49%. 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 36%, meaning it paid out 36% of its trailing 12-month EPS as dividend.

Looking at this fiscal year, CMI expects solid earnings growth. The Zacks Consensus Estimate for 2025 is $22.33 per share, which represents a year-over-year growth rate of 4.49%.

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. However, not all companies offer a quarterly payout.

For instance, it's a rare occurrence when a tech start-up or big growth business offers their shareholders a dividend. It's more common to see larger companies with more established profits give out dividends. During periods of rising interest rates, income investors must be mindful that high-yielding stocks tend to struggle. 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).

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