“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
— 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 twenty year holding period possibly?
Suppose a “buy-and-hold” investor was considering an investment into Walmart Inc (NYSE: WMT) back in 2000: back then, such an investor may have been pondering this very same question. Had they answered “yes” to a full twenty year investment time horizon and then actually held for these past 20 years, here’s how that investment would have turned out.
| Start date: | 11/02/2000 |
|
|||
| End date: | 10/30/2020 | ||||
| Start price/share: | $48.44 | ||||
| End price/share: | $138.75 | ||||
| Starting shares: | 206.45 | ||||
| Ending shares: | 300.21 | ||||
| Dividends reinvested/share: | $25.60 | ||||
| Total return: | 316.54% | ||||
| Average annual return: | 7.39% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $41,625.71 | ||||
As shown above, the twenty year investment result worked out well, with an annualized rate of return of 7.39%. This would have turned a $10K investment made 20 years ago into $41,625.71 today (as of 10/30/2020). On a total return basis, that’s a result of 316.54% (something to think about: how might WMT shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Walmart Inc paid investors a total of $25.60/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 2.16/share, we calculate that WMT has a current yield of approximately 1.56%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2.16 against the original $48.44/share purchase price. This works out to a yield on cost of 3.22%.
Here’s one more great investment quote before you go:
“Calling someone who trades actively in the market an investor is like calling someone who repeatedly engages in one-night stands a romantic.” — Warren Buffett
