“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
— Warren Buffett
One of the most important things investors can learn from Warren Buffett, is about how they approach their time horizon for an investment into a stock under consideration. Because immediately after buying shares of a given stock, investors will then be able to check on the day-to-day (and even minute-by-minute) market value. Some days the stock market will be up, other days down. These daily fluctuations can often distract from the long-term view. Today, we look at the result of a two-decade holding period for an investor who was considering eBay Inc. (NASD: EBAY) back in 2000, bought the stock, ignored the market’s ups and downs, and simply held through to today.
|Average annual return:||11.94%|
As we can see, the two-decade investment result worked out quite well, with an annualized rate of return of 11.94%. This would have turned a $10K investment made 20 years ago into $95,493.64 today (as of 07/14/2020). On a total return basis, that’s a result of 855.16% (something to think about: how might EBAY shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that eBay Inc. paid investors a total of $0.88/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 .64/share, we calculate that EBAY has a current yield of approximately 1.08%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of .64 against the original $6.33/share purchase price. This works out to a yield on cost of 17.06%.
Another great investment quote to think about:
“You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.” — Warren Buffett