“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
— 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 twenty year 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 Microsoft Corporation (NASD: MSFT), by taking a look at the investment outcome over a twenty year holding period.
|Average annual return:||14.93%|
As we can see, the twenty year investment result worked out quite well, with an annualized rate of return of 14.93%. This would have turned a $10K investment made 20 years ago into $161,807.73 today (as of 08/20/2021). On a total return basis, that’s a result of 1,519.32% (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.]
Notice that Microsoft Corporation paid investors a total of $21.31/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 2.24/share, we calculate that MSFT has a current yield of approximately 0.74%. 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 $29.56/share purchase price. This works out to a yield on cost of 2.50%.
Another great investment quote to think about:
“We ignore outlooks and forecastsâ€¦ we’re lousy at it and we admit it â€¦ everyone else is lousy too, but most people won’t admit it.” — Martin Whitman