“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”
— Warren Buffett
Such a great quote from Warren Buffett, highlighting the importance of investment time horizon when considering making an investment. In the short run, who knows what the stock market will do? A week or two after buying any given stock, could the entire stock market fall out of bed? Quite possibly! Should that happen, how would you react? It is an excellent question to think about before hitting the buy button.
For investors who take a multi-year time horizon, the important thing is not what happens in the next week or two, but what the result will be over the long haul. Today, we look at the result investors of the year 1999 experienced, who considered an investment in shares of Costco Wholesale Corp (NASD: COST) and decided upon a twenty year investment time horizon.
| Start date: | 05/24/1999 |
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| End date: | 05/23/2019 | ||||
| Start price/share: | $38.88 | ||||
| End price/share: | $248.53 | ||||
| Starting shares: | 257.20 | ||||
| Ending shares: | 350.65 | ||||
| Dividends reinvested/share: | $36.19 | ||||
| Total return: | 771.47% | ||||
| Average annual return: | 11.43% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $87,208.28 | ||||
The above analysis shows the twenty year investment result worked out quite well, with an annualized rate of return of 11.43%. This would have turned a $10K investment made 20 years ago into $87,208.28 today (as of 05/23/2019). On a total return basis, that’s a result of 771.47% (something to think about: how might COST 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 COST’s total return these past 20 years has been the payment by Costco Wholesale Corp of $36.19/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 2.6/share, we calculate that COST has a current yield of approximately 1.05%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2.6 against the original $38.88/share purchase price. This works out to a yield on cost of 2.70%.
Another great investment quote to think about:
“Don’t wait for the perfect time, you will wait forever. Always take advantage of the time you’re given and make it perfect.” — Daymond John
