“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”
— Warren Buffett
The above quote from Warren Buffett is timeless, and brings into focus the choice about time horizon that any investor should think about before buying a stock they are considering. Behind every stock is an actual business; what will that business look like over a two-decade period?
Today, let’s look backwards in time to 2000, and take a look at what happened to investors who asked that very question about US Bancorp (NYSE: USB), by taking a look at the investment outcome over a two-decade holding period.
| Start date: | 11/13/2000 |
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| End date: | 11/12/2020 | ||||
| Start price/share: | $19.00 | ||||
| End price/share: | $42.81 | ||||
| Starting shares: | 526.32 | ||||
| Ending shares: | 980.89 | ||||
| Dividends reinvested/share: | $20.87 | ||||
| Total return: | 319.92% | ||||
| Average annual return: | 7.43% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $41,961.66 | ||||
As we can see, the two-decade investment result worked out well, with an annualized rate of return of 7.43%. This would have turned a $10K investment made 20 years ago into $41,961.66 today (as of 11/12/2020). On a total return basis, that’s a result of 319.92% (something to think about: how might USB shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that US Bancorp paid investors a total of $20.87/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 USB has a current yield of approximately 3.92%. 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 $19.00/share purchase price. This works out to a yield on cost of 20.63%.
One more piece of investment wisdom to leave you with:
“Twenty years in this business convinces me that any normal person using the customary three percent of the brain can pick stocks just as well, if not better, than the average Wall Street expert.” — Peter Lynch
