“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
— Warren Buffett
A key lesson we can learn from Warren Buffett, is about how to think about a potential stock investment in the context of a long-term time horizon. Every investor in a stock has a choice: bite our fingernails over the short-term ups and downs that are inevitable with the stock market, or, zero in on stocks we are comfortable to simply buy and hold for the long haul — maybe even a ten year holding period. Heck, investors can even choose to completely ignore the stock market’s short-run quotations and instead go into their initial investment planning to hold on for years and years regardless of the fluctuations in price that might occur next.
Today, we examine what would have happened over a ten year holding period, had you decided back in 2010 to buy shares of Cummins, Inc. (NYSE: CMI) and simply hold through to today.
|Average annual return:||12.05%|
As shown above, the ten year investment result worked out quite well, with an annualized rate of return of 12.05%. This would have turned a $10K investment made 10 years ago into $31,197.41 today (as of 09/11/2020). On a total return basis, that’s a result of 212.01% (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.]
Notice that Cummins, Inc. paid investors a total of $33.44/share in dividends over the 10 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 2.52%. 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 $85.02/share purchase price. This works out to a yield on cost of 2.96%.
More investment wisdom to ponder:
“The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.” — Warren Buffett