“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
— Warren Buffett
Investors can learn a lot from Warren Buffett, whose above quote teaches the importance of thinking about investment time horizon, and asking ourselves before buying any given stock: can we envision holding onto it for years — even a two-decade holding period possibly?
Suppose a “buy-and-hold” investor was considering an investment into Cummins, Inc. (NYSE: CMI) back in 2000: back then, such an investor may have been pondering this very same question. Had they answered “yes” to a full two-decade investment time horizon and then actually held for these past 20 years, here’s how that investment would have turned out.
|Average annual return:||19.94%|
As shown above, the two-decade investment result worked out exceptionally well, with an annualized rate of return of 19.94%. This would have turned a $10K investment made 20 years ago into $379,749.52 today (as of 07/02/2020). On a total return basis, that’s a result of 3,699.77% (something to think about: how might CMI shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Cummins, Inc. paid investors a total of $36.40/share in dividends over the 20 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 5.244/share, we calculate that CMI has a current yield of approximately 3.02%. 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 $7.14/share purchase price. This works out to a yield on cost of 42.30%.
More investment wisdom to ponder:
“History provides a crucial insight regarding market crises: they are inevitable, painful and ultimately surmountable.” — Shelby Davis