“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
— Warren Buffett
The above quote from Warren Buffett is timeless, and brings into focus the choice about time horizon that any investor should think about before buying a stock they are considering. Behind every stock is an actual business; what will that business look like over a two-decade period?
Today, let’s look backwards in time to 2000, and take a look at what happened to investors who asked that very question about Marsh & McLennan Companies Inc. (NYSE: MMC), by taking a look at the investment outcome over a two-decade holding period.
| Start date: | 01/24/2000 |
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| End date: | 01/23/2020 | ||||
| Start price/share: | $51.16 | ||||
| End price/share: | $114.23 | ||||
| Starting shares: | 195.47 | ||||
| Ending shares: | 318.02 | ||||
| Dividends reinvested/share: | $20.86 | ||||
| Total return: | 263.28% | ||||
| Average annual return: | 6.66% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $36,336.11 | ||||
The above analysis shows the two-decade investment result worked out well, with an annualized rate of return of 6.66%. This would have turned a $10K investment made 20 years ago into $36,336.11 today (as of 01/23/2020). On a total return basis, that’s a result of 263.28% (something to think about: how might MMC shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Marsh & McLennan Companies Inc. paid investors a total of $20.86/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 1.82/share, we calculate that MMC has a current yield of approximately 1.59%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.82 against the original $51.16/share purchase price. This works out to a yield on cost of 3.11%.
One more investment quote to leave you with:
“Searching for companies is like looking for grubs under rocks: if you turn over 10 rocks you’ll likely find one grub; if you turn over 20 rocks you’ll find two.” — Peter Lynch
