“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 Best Buy Inc (NYSE: BBY) back in 2002: 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: | 05/10/2002 |
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| End date: | 05/09/2022 | ||||
| Start price/share: | $31.47 | ||||
| End price/share: | $91.08 | ||||
| Starting shares: | 317.76 | ||||
| Ending shares: | 479.85 | ||||
| Dividends reinvested/share: | $19.81 | ||||
| Total return: | 337.05% | ||||
| Average annual return: | 7.65% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $43,715.10 | ||||
As shown above, the twenty year investment result worked out well, with an annualized rate of return of 7.65%. This would have turned a $10K investment made 20 years ago into $43,715.10 today (as of 05/09/2022). On a total return basis, that’s a result of 337.05% (something to think about: how might BBY shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Best Buy Inc paid investors a total of $19.81/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 3.52/share, we calculate that BBY has a current yield of approximately 3.86%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 3.52 against the original $31.47/share purchase price. This works out to a yield on cost of 12.27%.
One more piece of investment wisdom to leave you with:
“The stock market is a device to transfer money from the impatient to the patient.” — Warren Buffett
