“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
— 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 Applied Materials, Inc. (NASD: AMAT), by taking a look at the investment outcome over a twenty year holding period.
| Start date: | 04/26/1999 |
|
|||
| End date: | 04/23/2019 | ||||
| Start price/share: | $15.19 | ||||
| End price/share: | $43.83 | ||||
| Starting shares: | 658.33 | ||||
| Ending shares: | 840.27 | ||||
| Dividends reinvested/share: | $4.71 | ||||
| Total return: | 268.29% | ||||
| Average annual return: | 6.73% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $36,803.17 | ||||
As we can see, the twenty year investment result worked out well, with an annualized rate of return of 6.73%. This would have turned a $10K investment made 20 years ago into $36,803.17 today (as of 04/23/2019). On a total return basis, that’s a result of 268.29% (something to think about: how might AMAT shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Applied Materials, Inc. paid investors a total of $4.71/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 .84/share, we calculate that AMAT has a current yield of approximately 1.92%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of .84 against the original $15.19/share purchase price. This works out to a yield on cost of 12.64%.
Another great investment quote to think about:
“When the public is most frightened, only the strong are left, and that’s when the market is in the best possible hands.” — Victor Niederhoffer
