“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 Best Buy Inc (NYSE: BBY) back in 1999, bought the stock, ignored the market’s ups and downs, and simply held through to today.
| Start date: | 12/06/1999 |
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| End date: | 12/05/2019 | ||||
| Start price/share: | $23.55 | ||||
| End price/share: | $80.32 | ||||
| Starting shares: | 424.63 | ||||
| Ending shares: | 599.08 | ||||
| Dividends reinvested/share: | $13.43 | ||||
| Total return: | 381.18% | ||||
| Average annual return: | 8.17% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $48,140.47 | ||||
As we can see, the twenty year investment result worked out well, with an annualized rate of return of 8.17%. This would have turned a $10K investment made 20 years ago into $48,140.47 today (as of 12/05/2019). On a total return basis, that’s a result of 381.18% (something to think about: how might BBY shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Many investors out there refuse to own any stock that lacks a dividend; in the case of Best Buy Inc, investors have received $13.43/share in dividends these past 20 years examined in the exercise above. This means total return was driven not just by share price, but also by the dividends received (and what the investor did with those dividends). For this exercise, what we’ve done with the dividends is to assume they are reinvestted — i.e. used to purchase additional shares (the calculations use closing price on ex-date).
Based upon the most recent annualized dividend rate of 2/share, we calculate that BBY has a current yield of approximately 2.49%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2 against the original $23.55/share purchase price. This works out to a yield on cost of 10.57%.
One more investment quote to leave you with:
“While some might mistakenly consider value investing a mechanical tool for identifying bargains, it is actually a comprehensive investment philosophy that emphasizes the need to perform in-depth fundamental analysis, pursue long-term investment results, limit risk, and resist crowd psychology.” — Seth Klarman
