“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
— Warren Buffett
The wisdom of Warren Buffett reflects a value-based philosophy about investing that says investors are buying shares in a business, and encourages strategic thinking about investment time horizon. Before placing a buy order for a stock, a great question we can ask is whether we would still be comfortable making the investment if we couldn’t sell it for many years?
A “buy-and-hold” approach may call for a time horizon that spans a long period of time — maybe even lasting for a two-decade holding period. Suppose such a “buy-and-hold” investor had looked into buying shares of Cummins, Inc. (NYSE: CMI) back in 2001. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
|Average annual return:||20.09%|
As shown above, the two-decade investment result worked out exceptionally well, with an annualized rate of return of 20.09%. This would have turned a $10K investment made 20 years ago into $389,753.82 today (as of 01/14/2021). On a total return basis, that’s a result of 3,795.46% (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.]
Beyond share price change, another component of CMI’s total return these past 20 years has been the payment by Cummins, Inc. of $38.91/share in dividends to shareholders. Automatic reinvestment of dividends can be a wonderful way to compound returns, and for the above calculations we presume that dividends are reinvested into additional shares of stock. (For the purpose of these calcuations, the closing price on ex-date is used).
Based upon the most recent annualized dividend rate of 5.4/share, we calculate that CMI has a current yield of approximately 2.24%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 5.4 against the original $9.64/share purchase price. This works out to a yield on cost of 23.24%.
One more investment quote to leave you with:
“Everyone has the brainpower to make money in stocks. Not everyone has the stomach. If you are susceptible to selling everything in a panic, you ought to avoid stocks and mutual funds altogether.” — Peter Lynch