“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”
— Warren Buffett
The above quote from Warren Buffett is timeless, and brings into focus the choice about time horizon that any investor should think about before buying a stock they are considering. Behind every stock is an actual business; what will that business look like over a twenty year period?
Today, let’s look backwards in time to 1999, and take a look at what happened to investors who asked that very question about Smith (A O) Corp (NYSE: AOS), by taking a look at the investment outcome over a twenty year holding period.
| Start date: | 03/22/1999 |
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| End date: | 03/19/2019 | ||||
| Start price/share: | $3.32 | ||||
| End price/share: | $52.13 | ||||
| Starting shares: | 3,012.05 | ||||
| Ending shares: | 4,296.92 | ||||
| Dividends reinvested/share: | $4.50 | ||||
| Total return: | 2,139.98% | ||||
| Average annual return: | 16.82% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $224,144.98 | ||||
As shown above, the twenty year investment result worked out exceptionally well, with an annualized rate of return of 16.82%. This would have turned a $10K investment made 20 years ago into $224,144.98 today (as of 03/19/2019). On a total return basis, that’s a result of 2,139.98% (something to think about: how might AOS shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Smith (A O) Corp paid investors a total of $4.50/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 .88/share, we calculate that AOS has a current yield of approximately 1.69%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of .88 against the original $3.32/share purchase price. This works out to a yield on cost of 50.90%.
One more piece of investment wisdom to leave you with:
“The most important thing about an investment philosophy is that you have one.” — David Booth
