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“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 twenty year holding period. Suppose such a “buy-and-hold” investor had looked into buying shares of Yum! Brands Inc (NYSE: YUM) 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: 11/19/1999
$10,000

11/19/1999
$169,716

11/18/2019
End date: 11/18/2019
Start price/share: $7.64
End price/share: $98.28
Starting shares: 1,308.90
Ending shares: 1,728.17
Dividends reinvested/share: $12.63
Total return: 1,598.44%
Average annual return: 15.20%
Starting investment: $10,000.00
Ending investment: $169,716.10

The above analysis shows the twenty year investment result worked out exceptionally well, with an annualized rate of return of 15.20%. This would have turned a $10K investment made 20 years ago into $169,716.10 today (as of 11/18/2019). On a total return basis, that’s a result of 1,598.44% (something to think about: how might YUM shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]

Notice that Yum! Brands Inc paid investors a total of $12.63/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 1.68/share, we calculate that YUM has a current yield of approximately 1.71%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.68 against the original $7.64/share purchase price. This works out to a yield on cost of 22.38%.

More investment wisdom to ponder:
“Buy not on optimism, but on arithmetic.” — Benjamin Graham