“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
— Warren Buffett
A critical pearl of wisdom from Warren Buffett teaches us that with any potential stock investment we may make, as soon as our buy order is filled we will have a choice: to remain a co-owner of that company for the long haul, or to react to the inevitable short-term ups and downs that the stock market is famous for (sometimes sharp ups and downs).
The reality of this choice forces us to challenge our confidence in any given company we might invest into, and keep our eyes on the long-term time horizon. The market may go up and down the interim, but over a ten year holding period, will the investment succeed?
Back in 2010, investors may have been asking themselves that very question about McDonald’s Corp (NYSE: MCD). Let’s examine what would have happened over a ten year holding period, had you invested in MCD shares back in 2010 and held on.
| Start date: | 09/20/2010 |
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| End date: | 09/17/2020 | ||||
| Start price/share: | $75.11 | ||||
| End price/share: | $222.58 | ||||
| Starting shares: | 133.14 | ||||
| Ending shares: | 178.36 | ||||
| Dividends reinvested/share: | $35.96 | ||||
| Total return: | 296.99% | ||||
| Average annual return: | 14.78% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $39,688.27 | ||||
The above analysis shows the ten year investment result worked out quite well, with an annualized rate of return of 14.78%. This would have turned a $10K investment made 10 years ago into $39,688.27 today (as of 09/17/2020). On a total return basis, that’s a result of 296.99% (something to think about: how might MCD shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Dividends are always an important investment factor to consider, and McDonald’s Corp has paid $35.96/share in dividends to shareholders over the past 10 years we looked at above. Many an investor will only invest in stocks that pay dividends, so this component of total return is always an important consideration. Automated reinvestment of dividends into additional shares of stock can be a great way for an investor to compound their returns. The above calculations are done with the assuption that dividends received over time are reinvested (the calcuations use the closing price on ex-date).
Based upon the most recent annualized dividend rate of 5/share, we calculate that MCD has a current yield of approximately 2.25%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 5 against the original $75.11/share purchase price. This works out to a yield on cost of 3.00%.
Here’s one more great investment quote before you go:
“Value investing requires a great deal of hard work, unusually strict discipline, and a long-term investment horizon. Few are willing and able to devote sufficient time and effort to become value investors, and only a fraction of those have the proper mind-set to succeed.” — Seth Klarman
