“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
— Warren Buffett
The Warren Buffett investment philosophy calls for a long-term investment horizon, where a two-decade holding period, or even longer, would fit right into the strategy. How would such a strategy have worked out for an investment into International Business Machines Corp (NYSE: IBM)? Today, we examine the outcome of a two-decade investment into the stock back in 2000.
| Start date: | 08/21/2000 |
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| End date: | 08/20/2020 | ||||
| Start price/share: | $121.44 | ||||
| End price/share: | $123.15 | ||||
| Starting shares: | 82.35 | ||||
| Ending shares: | 127.09 | ||||
| Dividends reinvested/share: | $60.60 | ||||
| Total return: | 56.51% | ||||
| Average annual return: | 2.26% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $15,639.47 | ||||
As shown above, the two-decade investment result worked out as follows, with an annualized rate of return of 2.26%. This would have turned a $10K investment made 20 years ago into $15,639.47 today (as of 08/20/2020). On a total return basis, that’s a result of 56.51% (something to think about: how might IBM shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that International Business Machines Corp paid investors a total of $60.60/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 6.52/share, we calculate that IBM has a current yield of approximately 5.29%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 6.52 against the original $121.44/share purchase price. This works out to a yield on cost of 4.36%.
One more piece of investment wisdom to leave you with:
“While it might seem that anyone can be a value investor, the essential characteristics of this type of investor-patience, discipline, and risk aversion-may well be genetically determined.” — Seth Klarman
