“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 2001, and take a look at what happened to investors who asked that very question about Verizon Communications Inc (NYSE: VZ), by taking a look at the investment outcome over a two-decade holding period.
| Start date: | 07/16/2001 |
|
|||
| End date: | 07/14/2021 | ||||
| Start price/share: | $50.28 | ||||
| End price/share: | $56.32 | ||||
| Starting shares: | 198.89 | ||||
| Ending shares: | 502.70 | ||||
| Dividends reinvested/share: | $38.33 | ||||
| Total return: | 183.12% | ||||
| Average annual return: | 5.34% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $28,317.31 | ||||
The above analysis shows the two-decade investment result worked out well, with an annualized rate of return of 5.34%. This would have turned a $10K investment made 20 years ago into $28,317.31 today (as of 07/14/2021). On a total return basis, that’s a result of 183.12% (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 $38.33/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 4.46%. 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 $50.28/share purchase price. This works out to a yield on cost of 8.87%.
One more investment quote to leave you with:
“If you’re prepared to invest in a company, then you ought to be able to explain why in simple language that a fifth grader could understand, and quickly enough so the fifth grader won’t get bored.” — Peter Lynch
