“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
— Warren Buffett
A critical pearl of wisdom from Warren Buffett teaches us that with any potential stock investment we may make, as soon as our buy order is filled we will have a choice: to remain a co-owner of that company for the long haul, or to react to the inevitable short-term ups and downs that the stock market is famous for (sometimes sharp ups and downs).
The reality of this choice forces us to challenge our confidence in any given company we might invest into, and keep our eyes on the long-term time horizon. The market may go up and down the interim, but over a decade-long holding period, will the investment succeed?
Back in 2009, investors may have been asking themselves that very question about Cummins, Inc. (NYSE: CMI). Let’s examine what would have happened over a decade-long holding period, had you invested in CMI shares back in 2009 and held on.
| Start date: | 11/27/2009 |
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| End date: | 11/25/2019 | ||||
| Start price/share: | $45.34 | ||||
| End price/share: | $184.02 | ||||
| Starting shares: | 220.56 | ||||
| Ending shares: | 277.64 | ||||
| Dividends reinvested/share: | $30.12 | ||||
| Total return: | 410.92% | ||||
| Average annual return: | 17.72% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $51,109.61 | ||||
The above analysis shows the decade-long investment result worked out exceptionally well, with an annualized rate of return of 17.72%. This would have turned a $10K investment made 10 years ago into $51,109.61 today (as of 11/25/2019). On a total return basis, that’s a result of 410.92% (something to think about: how might CMI shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Many investors out there refuse to own any stock that lacks a dividend; in the case of Cummins, Inc., investors have received $30.12/share in dividends these past 10 years examined in the exercise above. This means total return was driven not just by share price, but also by the dividends received (and what the investor did with those dividends). For this exercise, what we’ve done with the dividends is to assume they are reinvestted — i.e. used to purchase additional shares (the calculations use closing price on ex-date).
Based upon the most recent annualized dividend rate of 5.244/share, we calculate that CMI has a current yield of approximately 2.85%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 5.244 against the original $45.34/share purchase price. This works out to a yield on cost of 6.29%.
Another great investment quote to think about:
“If you’re prepared to invest in a company, then you ought to be able to explain why in simple language that a fifth grader could understand, and quickly enough so the fifth grader won’t get bored.” — Peter Lynch
