“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
— Warren Buffett
This inspiring quote from Warren Buffett teaches us the importance of considering our investment time horizon when approaching any given investment: Could we envision ourselves holding the stock we are considering for many years? Even a two-decade holding period potentially?
For “buy-and-hold” investors taking a long-term view, what’s important isn’t the short-term stock market fluctuations that will inevitably occur, but what happens over the long haul. Looking back 20 years to 2000, investors considering an investment into shares of Smith (A O) Corp (NYSE: AOS) may have been pondering this very question and thinking about their potential investment result over a full two-decade time horizon. Here’s how that would have worked out.
|Average annual return:||16.20%|
As shown above, the two-decade investment result worked out exceptionally well, with an annualized rate of return of 16.20%. This would have turned a $10K investment made 20 years ago into $201,595.05 today (as of 06/19/2020). On a total return basis, that’s a result of 1,917.20% (something to think about: how might AOS shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Beyond share price change, another component of AOS’s total return these past 20 years has been the payment by Smith (A O) Corp of $5.56/share in dividends to shareholders. Automatic reinvestment of dividends can be a wonderful way to compound returns, and for the above calculations we presume that dividends are reinvested into additional shares of stock. (For the purpose of these calcuations, the closing price on ex-date is used).
Based upon the most recent annualized dividend rate of .96/share, we calculate that AOS has a current yield of approximately 2.03%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of .96 against the original $3.34/share purchase price. This works out to a yield on cost of 60.78%.
Here’s one more great investment quote before you go:
“Don’t look for the needle in the haystack, just buy the haystack.” — John Bogle