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“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
$10,000

09/18/2000
$231,254

09/15/2020
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