“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”
— Warren Buffett
The Warren Buffett investment philosophy calls for a long-term investment horizon, where a two-decade holding period, or even longer, would fit right into the strategy. How would such a strategy have worked out for an investment into Merck & Co Inc (NYSE: MRK)? Today, we examine the outcome of a two-decade investment into the stock back in 1999.
| Start date: | 09/23/1999 |
|
|||
| End date: | 09/20/2019 | ||||
| Start price/share: | $68.56 | ||||
| End price/share: | $85.16 | ||||
| Starting shares: | 145.85 | ||||
| Ending shares: | 304.38 | ||||
| Dividends reinvested/share: | $34.87 | ||||
| Total return: | 159.21% | ||||
| Average annual return: | 4.88% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $25,939.82 | ||||
As shown above, the two-decade investment result worked out as follows, with an annualized rate of return of 4.88%. This would have turned a $10K investment made 20 years ago into $25,939.82 today (as of 09/20/2019). On a total return basis, that’s a result of 159.21% (something to think about: how might MRK shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Merck & Co Inc paid investors a total of $34.87/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 2.2/share, we calculate that MRK has a current yield of approximately 2.58%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2.2 against the original $68.56/share purchase price. This works out to a yield on cost of 3.76%.
Another great investment quote to think about:
“Buy not on optimism, but on arithmetic.” — Benjamin Graham
