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“I buy on the assumption that they could close the market the next day and not reopen it for five years.”

— Warren Buffett

The above quote from Warren Buffett is timeless, and brings into focus the choice about time horizon that any investor should think about before buying a stock they are considering. Behind every stock is an actual business; what will that business look like over a five year period?

Today, let’s look backwards in time to 2014, and take a look at what happened to investors who asked that very question about Cummins, Inc. (NYSE: CMI), by taking a look at the investment outcome over a five year holding period.

Start date: 03/19/2014
$10,000

03/19/2014
$12,952

03/18/2019
End date: 03/18/2019
Start price/share: $142.76
End price/share: $160.55
Starting shares: 70.05
Ending shares: 80.68
Dividends reinvested/share: $19.48
Total return: 29.54%
Average annual return: 5.31%
Starting investment: $10,000.00
Ending investment: $12,952.33

As shown above, the five year investment result worked out well, with an annualized rate of return of 5.31%. This would have turned a $10K investment made 5 years ago into $12,952.33 today (as of 03/18/2019). On a total return basis, that’s a result of 29.54% (something to think about: how might CMI shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]

Notice that Cummins, Inc. paid investors a total of $19.48/share in dividends over the 5 holding period, marking a second component of the total return beyond share price change alone. Much like watering a tree, reinvesting dividends can help an investment to grow over time — for the above calculations we assume dividend reinvestment (and for this exercise the closing price on ex-date is used for the reinvestment of a given dividend).

Based upon the most recent annualized dividend rate of 4.56/share, we calculate that CMI has a current yield of approximately 2.84%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 4.56 against the original $142.76/share purchase price. This works out to a yield on cost of 1.99%.

Another great investment quote to think about:
“Every day that you’re not selling an asset in your portfolio, you’re choosing to buy it.” — Sam Zell