“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 Gilead Sciences Inc (NASD: GILD) 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: | 09/13/1999 |
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| End date: | 09/11/2019 | ||||
| Start price/share: | $2.75 | ||||
| End price/share: | $68.08 | ||||
| Starting shares: | 3,636.36 | ||||
| Ending shares: | 4,073.92 | ||||
| Dividends reinvested/share: | $8.75 | ||||
| Total return: | 2,673.52% | ||||
| Average annual return: | 18.07% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $277,577.46 | ||||
The above analysis shows the two-decade investment result worked out exceptionally well, with an annualized rate of return of 18.07%. This would have turned a $10K investment made 20 years ago into $277,577.46 today (as of 09/11/2019). On a total return basis, that’s a result of 2,673.52% (something to think about: how might GILD shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Gilead Sciences Inc paid investors a total of $8.75/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 2.52/share, we calculate that GILD has a current yield of approximately 3.70%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2.52 against the original $2.75/share purchase price. This works out to a yield on cost of 134.55%.
More investment wisdom to ponder:
“The investor’s chief problem, even his worst enemy, is likely to be himself.” — Benjamin Graham
