“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”
— Warren Buffett
This inspiring quote from Warren Buffett teaches us the importance of considering our investment time horizon when approaching any given investment: Could we envision ourselves holding the stock we are considering for many years? Even a twenty year holding period potentially?
For “buy-and-hold” investors taking a long-term view, what’s important isn’t the short-term stock market fluctuations that will inevitably occur, but what happens over the long haul. Looking back 20 years to 2000, investors considering an investment into shares of ConocoPhillips (NYSE: COP) may have been pondering this very question and thinking about their potential investment result over a full twenty year time horizon. Here’s how that would have worked out.
| Start date: | 09/05/2000 |
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| End date: | 09/01/2020 | ||||
| Start price/share: | $24.11 | ||||
| End price/share: | $37.16 | ||||
| Starting shares: | 414.77 | ||||
| Ending shares: | 765.24 | ||||
| Dividends reinvested/share: | $29.10 | ||||
| Total return: | 184.36% | ||||
| Average annual return: | 5.36% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $28,416.94 | ||||
The above analysis shows the twenty year investment result worked out well, with an annualized rate of return of 5.36%. This would have turned a $10K investment made 20 years ago into $28,416.94 today (as of 09/01/2020). On a total return basis, that’s a result of 184.36% (something to think about: how might COP shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that ConocoPhillips paid investors a total of $29.10/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 1.68/share, we calculate that COP has a current yield of approximately 4.52%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.68 against the original $24.11/share purchase price. This works out to a yield on cost of 18.75%.
One more piece of investment wisdom to leave you with:
“If you’re prepared to invest in a company, then you ought to be able to explain why in simple language that a fifth grader could understand, and quickly enough so the fifth grader won’t get bored.” — Peter Lynch
