“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
— 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 two-decade holding period, will the investment succeed?
Back in 2002, investors may have been asking themselves that very question about Cummins, Inc. (NYSE: CMI). Let’s examine what would have happened over a two-decade holding period, had you invested in CMI shares back in 2002 and held on.
|Average annual return:||21.22%|
As we can see, the two-decade investment result worked out exceptionally well, with an annualized rate of return of 21.22%. This would have turned a $10K investment made 20 years ago into $470,080.79 today (as of 08/03/2022). On a total return basis, that’s a result of 4,597.46% (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 $46.96/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 6.28/share, we calculate that CMI has a current yield of approximately 2.88%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 6.28 against the original $7.15/share purchase price. This works out to a yield on cost of 40.28%.
Here’s one more great investment quote before you go:
“I think you have to learn that there’s a company behind every stock, and that there’s only one real reason why stocks go up. Companies go from doing poorly to doing well or small companies grow to large companies.” — Peter Lynch