“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 Cerner Corp. (NASD: CERN) 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: | 07/31/2000 |
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| End date: | 07/30/2020 | ||||
| Start price/share: | $4.38 | ||||
| End price/share: | $71.26 | ||||
| Starting shares: | 2,283.11 | ||||
| Ending shares: | 2,313.04 | ||||
| Dividends reinvested/share: | $0.90 | ||||
| Total return: | 1,548.27% | ||||
| Average annual return: | 15.03% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $164,774.05 | ||||
The above analysis shows the twenty year investment result worked out exceptionally well, with an annualized rate of return of 15.03%. This would have turned a $10K investment made 20 years ago into $164,774.05 today (as of 07/30/2020). On a total return basis, that’s a result of 1,548.27% (something to think about: how might CERN shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Cerner Corp. paid investors a total of $0.90/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 .72/share, we calculate that CERN has a current yield of approximately 1.01%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of .72 against the original $4.38/share purchase price. This works out to a yield on cost of 23.06%.
Here’s one more great investment quote before you go:
“Investors should purchase stocks like they purchase groceries, not like they purchase perfume.” — Benjamin Graham
