“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”
— Warren Buffett
Such a great quote from Warren Buffett, highlighting the importance of investment time horizon when considering making an investment. In the short run, who knows what the stock market will do? A week or two after buying any given stock, could the entire stock market fall out of bed? Quite possibly! Should that happen, how would you react? It is an excellent question to think about before hitting the buy button.
For investors who take a multi-year time horizon, the important thing is not what happens in the next week or two, but what the result will be over the long haul. Today, we look at the result investors of the year 2001 experienced, who considered an investment in shares of Microsoft Corporation (NASD: MSFT) and decided upon a twenty year investment time horizon.
| Start date: | 07/19/2001 |
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| End date: | 07/16/2021 | ||||
| Start price/share: | $36.29 | ||||
| End price/share: | $280.75 | ||||
| Starting shares: | 275.56 | ||||
| Ending shares: | 432.54 | ||||
| Dividends reinvested/share: | $20.75 | ||||
| Total return: | 1,114.36% | ||||
| Average annual return: | 13.29% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $121,374.79 | ||||
As shown above, the twenty year investment result worked out quite well, with an annualized rate of return of 13.29%. This would have turned a $10K investment made 20 years ago into $121,374.79 today (as of 07/16/2021). On a total return basis, that’s a result of 1,114.36% (something to think about: how might MSFT shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Beyond share price change, another component of MSFT’s total return these past 20 years has been the payment by Microsoft Corporation of $20.75/share in dividends to shareholders. Automatic reinvestment of dividends can be a wonderful way to compound returns, and for the above calculations we presume that dividends are reinvested into additional shares of stock. (For the purpose of these calcuations, the closing price on ex-date is used).
Based upon the most recent annualized dividend rate of 2.24/share, we calculate that MSFT has a current yield of approximately 0.80%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2.24 against the original $36.29/share purchase price. This works out to a yield on cost of 2.20%.
More investment wisdom to ponder:
“Value investing means really asking what are the best values, and not assuming that because something looks expensive that it is, or assuming that because a stock is down in price and trades at low multiples that it is a bargain.” — Bill Miller
