“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
— Warren Buffett
The wisdom of Warren Buffett reflects a value-based philosophy about investing that says investors are buying shares in a business, and encourages strategic thinking about investment time horizon. Before placing a buy order for a stock, a great question we can ask is whether we would still be comfortable making the investment if we couldn’t sell it for many years?
A “buy-and-hold” approach may call for a time horizon that spans a long period of time — maybe even lasting for a two-decade holding period. Suppose such a “buy-and-hold” investor had looked into buying shares of General Mills Inc (NYSE: GIS) back in 1999. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
| Start date: | 07/30/1999 |
|
|||
| End date: | 07/29/2019 | ||||
| Start price/share: | $20.71 | ||||
| End price/share: | $53.70 | ||||
| Starting shares: | 482.86 | ||||
| Ending shares: | 869.05 | ||||
| Dividends reinvested/share: | $22.06 | ||||
| Total return: | 366.68% | ||||
| Average annual return: | 8.00% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $46,648.90 | ||||
As shown above, the two-decade investment result worked out well, with an annualized rate of return of 8.00%. This would have turned a $10K investment made 20 years ago into $46,648.90 today (as of 07/29/2019). On a total return basis, that’s a result of 366.68% (something to think about: how might GIS shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that General Mills Inc paid investors a total of $22.06/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 1.96/share, we calculate that GIS has a current yield of approximately 3.65%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.96 against the original $20.71/share purchase price. This works out to a yield on cost of 17.62%.
Another great investment quote to think about:
“Searching for companies is like looking for grubs under rocks: if you turn over 10 rocks you’ll likely find one grub; if you turn over 20 rocks you’ll find two.” — Peter Lynch
