“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
— Warren Buffett
A critical pearl of wisdom from Warren Buffett teaches us that with any potential stock investment we may make, as soon as our buy order is filled we will have a choice: to remain a co-owner of that company for the long haul, or to react to the inevitable short-term ups and downs that the stock market is famous for (sometimes sharp ups and downs).
The reality of this choice forces us to challenge our confidence in any given company we might invest into, and keep our eyes on the long-term time horizon. The market may go up and down the interim, but over a two-decade holding period, will the investment succeed?
Back in 2000, investors may have been asking themselves that very question about AvalonBay Communities, Inc. (NYSE: AVB). Let’s examine what would have happened over a two-decade holding period, had you invested in AVB shares back in 2000 and held on.
| Start date: | 05/11/2000 |
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| End date: | 05/08/2020 | ||||
| Start price/share: | $40.19 | ||||
| End price/share: | $163.96 | ||||
| Starting shares: | 248.83 | ||||
| Ending shares: | 561.04 | ||||
| Dividends reinvested/share: | $80.52 | ||||
| Total return: | 819.87% | ||||
| Average annual return: | 11.73% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $91,972.91 | ||||
As we can see, the two-decade investment result worked out quite well, with an annualized rate of return of 11.73%. This would have turned a $10K investment made 20 years ago into $91,972.91 today (as of 05/08/2020). On a total return basis, that’s a result of 819.87% (something to think about: how might AVB shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that AvalonBay Communities, Inc. paid investors a total of $80.52/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 6.36/share, we calculate that AVB has a current yield of approximately 3.88%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 6.36 against the original $40.19/share purchase price. This works out to a yield on cost of 9.65%.
Here’s one more great investment quote before you go:
“The function of economic forecasting is to make astrology look respectable.” — John Galbraith
