“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 Baxter International Inc (NYSE: BAX) 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.
|Average annual return:||7.53%|
The above analysis shows the twenty year investment result worked out well, with an annualized rate of return of 7.53%. This would have turned a $10K investment made 20 years ago into $42,750.23 today (as of 11/18/2021). On a total return basis, that’s a result of 327.70% (something to think about: how might BAX shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Baxter International Inc paid investors a total of $12.95/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 1.12/share, we calculate that BAX has a current yield of approximately 1.42%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.12 against the original $26.59/share purchase price. This works out to a yield on cost of 5.34%.
Another great investment quote to think about:
“In the long run, we are all dead.” — John Maynard Keynes