“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
— 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 Kellogg Co (NYSE: K) back in 2000: 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: | 06/19/2000 |
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| End date: | 06/16/2020 | ||||
| Start price/share: | $28.31 | ||||
| End price/share: | $66.68 | ||||
| Starting shares: | 353.20 | ||||
| Ending shares: | 642.32 | ||||
| Dividends reinvested/share: | $31.10 | ||||
| Total return: | 328.30% | ||||
| Average annual return: | 7.54% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $42,812.80 | ||||
As shown above, the twenty year investment result worked out well, with an annualized rate of return of 7.54%. This would have turned a $10K investment made 20 years ago into $42,812.80 today (as of 06/16/2020). On a total return basis, that’s a result of 328.30% (something to think about: how might K shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Kellogg Co paid investors a total of $31.10/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 2.28/share, we calculate that K has a current yield of approximately 3.42%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2.28 against the original $28.31/share purchase price. This works out to a yield on cost of 12.08%.
More investment wisdom to ponder:
“You can’t be a good value investor without being an independent thinker; you’re seeing valuations that the market is not appreciating. But it’s critical that you understand why the market isn’t seeing the value you do.” — Joel Greenblatt
