“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 twenty year holding period possibly?
Suppose a “buy-and-hold” investor was considering an investment into eBay Inc. (NASD: EBAY) back in 2001: back then, such an investor may have been pondering this very same question. Had they answered “yes” to a full twenty year investment time horizon and then actually held for these past 20 years, here’s how that investment would have turned out.
| Start date: | 10/22/2001 |
|
|||
| End date: | 10/20/2021 | ||||
| Start price/share: | $5.59 | ||||
| End price/share: | $75.97 | ||||
| Starting shares: | 1,788.91 | ||||
| Ending shares: | 1,857.61 | ||||
| Dividends reinvested/share: | $1.74 | ||||
| Total return: | 1,311.23% | ||||
| Average annual return: | 14.14% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $141,003.36 | ||||
As shown above, the twenty year investment result worked out quite well, with an annualized rate of return of 14.14%. This would have turned a $10K investment made 20 years ago into $141,003.36 today (as of 10/20/2021). On a total return basis, that’s a result of 1,311.23% (something to think about: how might EBAY shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that eBay Inc. paid investors a total of $1.74/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 .72/share, we calculate that EBAY has a current yield of approximately 0.95%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of .72 against the original $5.59/share purchase price. This works out to a yield on cost of 16.99%.
One more piece of investment wisdom to leave you with:
“If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.” — Peter Lynch
