“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
— Warren Buffett
Such a great quote from Warren Buffett, highlighting the importance of investment time horizon when considering making an investment. In the short run, who knows what the stock market will do? A week or two after buying any given stock, could the entire stock market fall out of bed? Quite possibly! Should that happen, how would you react? It is an excellent question to think about before hitting the buy button.
For investors who take a multi-year time horizon, the important thing is not what happens in the next week or two, but what the result will be over the long haul. Today, we look at the result investors of the year 2000 experienced, who considered an investment in shares of Illinois Tool Works, Inc. (NYSE: ITW) and decided upon a two-decade investment time horizon.
| Start date: | 08/07/2000 |
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| End date: | 08/04/2020 | ||||
| Start price/share: | $28.06 | ||||
| End price/share: | $185.09 | ||||
| Starting shares: | 356.38 | ||||
| Ending shares: | 545.31 | ||||
| Dividends reinvested/share: | $31.74 | ||||
| Total return: | 909.31% | ||||
| Average annual return: | 12.25% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $100,925.75 | ||||
As we can see, the two-decade investment result worked out quite well, with an annualized rate of return of 12.25%. This would have turned a $10K investment made 20 years ago into $100,925.75 today (as of 08/04/2020). On a total return basis, that’s a result of 909.31% (something to think about: how might ITW shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Illinois Tool Works, Inc. paid investors a total of $31.74/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 4.28/share, we calculate that ITW has a current yield of approximately 2.31%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 4.28 against the original $28.06/share purchase price. This works out to a yield on cost of 8.23%.
One more investment quote to leave you with:
“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
