JUST BOUGHT THIS STOCK! It Could Benefit From the Upcoming Infrastructure Plan

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► Read it Here: https://dividendsandincome.com/2021/08/17/we-just-bought-cummins-cmi-for-the-income-builder-portfolio/

If you’re considering a cyclical stock for your portfolio, you probably should take one of two approaches:

I’m going to actively trade this, trying to time buys when there are down cycles and sells when there are up cycles, or I’m going to try to buy this at fair value or better, with the plan to hold it long-term through many cycles. As a Dividend Growth Investing practitioner who appreciates the strategy’s compounding effect over many years, I almost always travel the second road.

That’s also the way I manage the Income Builder Portfolio, the real-money project we launched at the start of 2018: I have made very few sells, and not a single one was an attempt to time a cycle.

So it should be no surprise that I’m planning something similar with the IBP’s latest addition: truck-engine maker Cummins (CMI).

On Monday, Aug. 16, I executed a purchase order for about $1,000 worth of CMI on behalf of this site’s co-founder (and IBP money-man), Greg Patrick.

Whole shares purchased via limit order; fractional share purchased via “Schwab Stock Slices”

Most companies in that sector are considered cyclical because their earnings usually rise, often significantly, when the overall economy and/or their given industries, are doing well; during rough patches, the opposite is true.

When customers such as construction equipment maker Deere (DE) and vehicle manufacturer Stellantis (STLA) are thriving, they buy engines, parts and technology from Cummins; when they are struggling, CMI’s earnings and revenues can be adversely affected.

Because stock prices generally follow earnings, cyclical Industrial stocks like Cummins often are more volatile than “defensive” stocks from the Consumer Staples, Health Care and Utilities sectors.

There have been many stretches — including so far in 2021 — during which CMI has underperformed the overall market. Patience, however, has been rewarded quite handsomely.

Indeed, a CMI investor would have experienced total return almost exactly triple that of an index investor.

Cummins’ free cash flow easily covers its dividend. The company also has low payout ratios, suggesting there is plenty of room for future dividend increases.

No wonder Simply Safe Dividends gives Cummins an almost perfect “safety” score of 98, a sign that SSD’s researchers believe there is virtually no chance CMI will cut its dividend.

Because we initiated our Cummins position before the ex-dividend date (Thursday, Aug. 19), we will receive the $1.45 quarterly payout on Sept. 2 for each of our 4.1882 shares — a total of $6.07.

Oh, and this is important to remember: I’m definitely not suggesting that you buy Cummins … or anything else in the IBP. No, we’ve made this project public to get folks thinking about portfolio-building concepts … and also to present interesting investing candidates for you to research thoroughly.

That will be reinvested right back into CMI, as mandated by the IBP Business Plan, to buy an additional fraction of a share. It won’t seem like much at the time, but over the years that compounding process will create considerable extra income from CMI and our other 43 positions.

With this selection of Cummins for the Income Builder Portfolio, I’m reasonably confident that there is plenty of life remaining in its industry’s current up cycle.

Admittedly, though, we sometimes don’t know a cycle has flipped until the change is already well underway.

That’s why I’m almost always thinking about choosing high-quality businesses and holding them long-term. To that extent, CMI is a fitting addition to this portfolio.

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