“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”
— 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 Yum! Brands Inc (NYSE: YUM) 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: | 09/18/2000 |
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| End date: | 09/15/2020 | ||||
| Start price/share: | $5.44 | ||||
| End price/share: | $93.52 | ||||
| Starting shares: | 1,838.24 | ||||
| Ending shares: | 2,473.01 | ||||
| Dividends reinvested/share: | $14.46 | ||||
| Total return: | 2,212.76% | ||||
| Average annual return: | 17.00% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $231,254.85 | ||||
As shown above, the two-decade investment result worked out exceptionally well, with an annualized rate of return of 17.00%. This would have turned a $10K investment made 20 years ago into $231,254.85 today (as of 09/15/2020). On a total return basis, that’s a result of 2,212.76% (something to think about: how might YUM shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Yum! Brands Inc paid investors a total of $14.46/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 1.88/share, we calculate that YUM has a current yield of approximately 2.01%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.88 against the original $5.44/share purchase price. This works out to a yield on cost of 36.95%.
Another great investment quote to think about:
“The stock market is filled with individuals who know the price of everything, but the value of nothing.” — Phillip Fisher
