“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 two-decade holding period possibly?
Suppose a “buy-and-hold” investor was considering an investment into Intuit Inc (NASD: INTU) 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: | 11/13/2000 |
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| End date: | 11/11/2020 | ||||
| Start price/share: | $27.78 | ||||
| End price/share: | $352.40 | ||||
| Starting shares: | 359.97 | ||||
| Ending shares: | 395.14 | ||||
| Dividends reinvested/share: | $11.75 | ||||
| Total return: | 1,292.46% | ||||
| Average annual return: | 14.07% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $139,283.20 | ||||
As shown above, the two-decade investment result worked out quite well, with an annualized rate of return of 14.07%. This would have turned a $10K investment made 20 years ago into $139,283.20 today (as of 11/11/2020). On a total return basis, that’s a result of 1,292.46% (something to think about: how might INTU shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Intuit Inc paid investors a total of $11.75/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 2.36/share, we calculate that INTU has a current yield of approximately 0.67%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2.36 against the original $27.78/share purchase price. This works out to a yield on cost of 2.41%.
Here’s one more great investment quote before you go:
“Never is there a better time to buy a stock than when a basically sound company, for whatever reason, temporarily falls out of favor with the investment community.” — Geraldine Weiss
