“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”
— Warren Buffett
Investors can learn a lot from Warren Buffett, whose above quote teaches the importance of thinking about investment time horizon, and asking ourselves before buying any given stock: can we envision holding onto it for years — even a twenty year holding period possibly?
Suppose a “buy-and-hold” investor was considering an investment into Smith (A O) Corp (NYSE: AOS) back in 1999: back then, such an investor may have been pondering this very same question. Had they answered “yes” to a full twenty year investment time horizon and then actually held for these past 20 years, here’s how that investment would have turned out.
| Start date: | 10/08/1999 |
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| End date: | 10/07/2019 | ||||
| Start price/share: | $5.15 | ||||
| End price/share: | $45.13 | ||||
| Starting shares: | 1,941.75 | ||||
| Ending shares: | 2,769.18 | ||||
| Dividends reinvested/share: | $4.90 | ||||
| Total return: | 1,149.73% | ||||
| Average annual return: | 13.45% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $124,936.86 | ||||
As we can see, the twenty year investment result worked out quite well, with an annualized rate of return of 13.45%. This would have turned a $10K investment made 20 years ago into $124,936.86 today (as of 10/07/2019). On a total return basis, that’s a result of 1,149.73% (something to think about: how might AOS shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Smith (A O) Corp paid investors a total of $4.90/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 .88/share, we calculate that AOS has a current yield of approximately 1.95%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of .88 against the original $5.15/share purchase price. This works out to a yield on cost of 37.86%.
One more piece of investment wisdom to leave you with:
“You make most of your money in a bear market, you just don’t realize it at the time.” — Shelby Davis
