“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.
| Start date: | 08/23/2001 |
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| End date: | 08/20/2021 | ||||
| Start price/share: | $29.56 | ||||
| End price/share: | $304.36 | ||||
| Starting shares: | 338.29 | ||||
| Ending shares: | 532.04 | ||||
| Dividends reinvested/share: | $21.31 | ||||
| Total return: | 1,519.32% | ||||
| Average annual return: | 14.93% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $161,807.73 | ||||
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 forecasts… we’re lousy at it and we admit it … everyone else is lousy too, but most people won’t admit it.” — Martin Whitman
