“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
— Warren Buffett
Investors can learn a lot from Warren Buffett, whose above quote teaches the importance of thinking about investment time horizon, and asking ourselves before buying any given stock: can we envision holding onto it for years — even a two-decade holding period possibly?
Suppose a “buy-and-hold” investor was considering an investment into National Oilwell Varco Inc (NYSE: NOV) back in 1999: back then, such an investor may have been pondering this very same question. Had they answered “yes” to a full two-decade investment time horizon and then actually held for these past 20 years, here’s how that investment would have turned out.
| Start date: | 04/16/1999 |
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| End date: | 04/15/2019 | ||||
| Start price/share: | $5.72 | ||||
| End price/share: | $27.53 | ||||
| Starting shares: | 1,748.25 | ||||
| Ending shares: | 2,043.06 | ||||
| Dividends reinvested/share: | $7.54 | ||||
| Total return: | 462.45% | ||||
| Average annual return: | 9.01% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $56,200.14 | ||||
The above analysis shows the two-decade investment result worked out well, with an annualized rate of return of 9.01%. This would have turned a $10K investment made 20 years ago into $56,200.14 today (as of 04/15/2019). On a total return basis, that’s a result of 462.45% (something to think about: how might NOV shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that National Oilwell Varco Inc paid investors a total of $7.54/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 .2/share, we calculate that NOV has a current yield of approximately 0.73%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of .2 against the original $5.72/share purchase price. This works out to a yield on cost of 12.76%.
More investment wisdom to ponder:
“You can get in much more trouble with a good idea than a bad idea, because you forget that the good idea has limits.” — Benjamin Graham
