“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
— Warren Buffett
Investors can learn a lot from Warren Buffett, whose above quote teaches the importance of thinking about investment time horizon, and asking ourselves before buying any given stock: can we envision holding onto it for years — even a two-decade holding period possibly?
Suppose a “buy-and-hold” investor was considering an investment into Hershey Company (NYSE: HSY) back in 2001: back then, such an investor may have been pondering this very same question. Had they answered “yes” to a full two-decade investment time horizon and then actually held for these past 20 years, here’s how that investment would have turned out.
| Start date: | 10/04/2001 |
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| End date: | 10/01/2021 | ||||
| Start price/share: | $31.75 | ||||
| End price/share: | $170.78 | ||||
| Starting shares: | 314.96 | ||||
| Ending shares: | 497.22 | ||||
| Dividends reinvested/share: | $34.29 | ||||
| Total return: | 749.14% | ||||
| Average annual return: | 11.28% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $84,839.22 | ||||
As shown above, the two-decade investment result worked out quite well, with an annualized rate of return of 11.28%. This would have turned a $10K investment made 20 years ago into $84,839.22 today (as of 10/01/2021). On a total return basis, that’s a result of 749.14% (something to think about: how might HSY shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Hershey Company paid investors a total of $34.29/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 3.604/share, we calculate that HSY has a current yield of approximately 2.11%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 3.604 against the original $31.75/share purchase price. This works out to a yield on cost of 6.65%.
More investment wisdom to ponder:
“Value investing is at its core the marriage of a contrarian streak and a calculator.” — Seth Klarman
