“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”
— 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 twenty year period?
Today, let’s look backwards in time to 2002, and take a look at what happened to investors who asked that very question about Abbott Laboratories (NYSE: ABT), by taking a look at the investment outcome over a twenty year holding period.
| Start date: | 06/28/2002 |
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| End date: | 06/27/2022 | ||||
| Start price/share: | $16.90 | ||||
| End price/share: | $109.08 | ||||
| Starting shares: | 591.72 | ||||
| Ending shares: | 1,010.25 | ||||
| Dividends reinvested/share: | $19.21 | ||||
| Total return: | 1,001.98% | ||||
| Average annual return: | 12.74% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $110,187.25 | ||||
As we can see, the twenty year investment result worked out quite well, with an annualized rate of return of 12.74%. This would have turned a $10K investment made 20 years ago into $110,187.25 today (as of 06/27/2022). On a total return basis, that’s a result of 1,001.98% (something to think about: how might ABT shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Abbott Laboratories paid investors a total of $19.21/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 1.88/share, we calculate that ABT has a current yield of approximately 1.72%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.88 against the original $16.90/share purchase price. This works out to a yield on cost of 10.18%.
More investment wisdom to ponder:
“Sometimes buying early on the way down looks like being wrong, but it isn’t.” — Seth Klarman
