“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 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 United Parcel Service Inc (NYSE: UPS), by taking a look at the investment outcome over a two-decade holding period.
| Start date: | 09/04/2001 |
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| End date: | 08/31/2021 | ||||
| Start price/share: | $55.36 | ||||
| End price/share: | $195.63 | ||||
| Starting shares: | 180.64 | ||||
| Ending shares: | 303.01 | ||||
| Dividends reinvested/share: | $46.45 | ||||
| Total return: | 492.77% | ||||
| Average annual return: | 9.30% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $59,225.54 | ||||
As shown above, the two-decade investment result worked out well, with an annualized rate of return of 9.30%. This would have turned a $10K investment made 20 years ago into $59,225.54 today (as of 08/31/2021). On a total return basis, that’s a result of 492.77% (something to think about: how might UPS shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that United Parcel Service Inc paid investors a total of $46.45/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 4.08/share, we calculate that UPS has a current yield of approximately 2.09%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 4.08 against the original $55.36/share purchase price. This works out to a yield on cost of 3.78%.
Another great investment quote to think about:
“The whole secret to winning big in the stock market is not to be right all the time, but to lose the least amount possible when you’re wrong.” — William O’Neil
