“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
— Warren Buffett
The wisdom of Warren Buffett reflects a value-based philosophy about investing that says investors are buying shares in a business, and encourages strategic thinking about investment time horizon. Before placing a buy order for a stock, a great question we can ask is whether we would still be comfortable making the investment if we couldn’t sell it for many years?
A “buy-and-hold” approach may call for a time horizon that spans a long period of time — maybe even lasting for a twenty year holding period. Suppose such a “buy-and-hold” investor had looked into buying shares of 3M Co (NYSE: MMM) back in 2002. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
|Average annual return:||7.20%|
As shown above, the twenty year investment result worked out well, with an annualized rate of return of 7.20%. This would have turned a $10K investment made 20 years ago into $40,192.39 today (as of 08/10/2022). On a total return basis, that’s a result of 301.61% (something to think about: how might MMM shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that 3M Co paid investors a total of $64.70/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 5.96/share, we calculate that MMM has a current yield of approximately 3.99%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 5.96 against the original $62.82/share purchase price. This works out to a yield on cost of 6.35%.
Here’s one more great investment quote before you go:
“Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” — Albert Einstein