“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 two-decade holding period possibly?
Suppose a “buy-and-hold” investor was considering an investment into McDonald’s Corp (NYSE: MCD) back in 2000: back then, such an investor may have been pondering this very same question. Had they answered “yes” to a full two-decade investment time horizon and then actually held for these past 20 years, here’s how that investment would have turned out.
| Start date: | 06/01/2000 |
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| End date: | 05/29/2020 | ||||
| Start price/share: | $35.62 | ||||
| End price/share: | $186.32 | ||||
| Starting shares: | 280.70 | ||||
| Ending shares: | 465.17 | ||||
| Dividends reinvested/share: | $44.83 | ||||
| Total return: | 766.71% | ||||
| Average annual return: | 11.40% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $86,688.35 | ||||
As we can see, the two-decade investment result worked out quite well, with an annualized rate of return of 11.40%. This would have turned a $10K investment made 20 years ago into $86,688.35 today (as of 05/29/2020). On a total return basis, that’s a result of 766.71% (something to think about: how might MCD shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that McDonald’s Corp paid investors a total of $44.83/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 5/share, we calculate that MCD has a current yield of approximately 2.68%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 5 against the original $35.62/share purchase price. This works out to a yield on cost of 7.52%.
Here’s one more great investment quote before you go:
“The greater the passive income you can build, the freer you will become.” — Todd Fleming
