“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
— Warren Buffett
One of the most important things investors can learn from Warren Buffett, is about how they approach their time horizon for an investment into a stock under consideration. Because immediately after buying shares of a given stock, investors will then be able to check on the day-to-day (and even minute-by-minute) market value. Some days the stock market will be up, other days down. These daily fluctuations can often distract from the long-term view. Today, we look at the result of a twenty year holding period for an investor who was considering Microsoft Corporation (NASD: MSFT) back in 1999, bought the stock, ignored the market’s ups and downs, and simply held through to today.
|Average annual return:||7.80%|
As we can see, the twenty year investment result worked out well, with an annualized rate of return of 7.80%. This would have turned a $10K investment made 20 years ago into $44,941.06 today (as of 07/10/2019). On a total return basis, that’s a result of 349.52% (something to think about: how might MSFT shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Microsoft Corporation paid investors a total of $16.57/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 1.84/share, we calculate that MSFT has a current yield of approximately 1.33%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.84 against the original $47.09/share purchase price. This works out to a yield on cost of 2.82%.
One more piece of investment wisdom to leave you with:
“Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” — Albert Einstein