“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 Verizon Communications Inc (NYSE: VZ) back in 2001: 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: | 04/23/2001 |
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| End date: | 04/20/2021 | ||||
| Start price/share: | $47.58 | ||||
| End price/share: | $58.39 | ||||
| Starting shares: | 210.17 | ||||
| Ending shares: | 529.10 | ||||
| Dividends reinvested/share: | $38.05 | ||||
| Total return: | 208.94% | ||||
| Average annual return: | 5.80% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $30,892.11 | ||||
The above analysis shows the twenty year investment result worked out well, with an annualized rate of return of 5.80%. This would have turned a $10K investment made 20 years ago into $30,892.11 today (as of 04/20/2021). On a total return basis, that’s a result of 208.94% (something to think about: how might VZ shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Verizon Communications Inc paid investors a total of $38.05/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 2.51/share, we calculate that VZ has a current yield of approximately 4.30%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2.51 against the original $47.58/share purchase price. This works out to a yield on cost of 9.04%.
One more piece of investment wisdom to leave you with:
“If a speculator is correct half of the time, he is hitting a good average. Even being right 3 or 4 times out of 10 should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he is wrong.” — Bernard Baruch
