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“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 two-decade holding period possibly?

Suppose a “buy-and-hold” investor was considering an investment into McDonald’s Corp (NYSE: MCD) back in 2002: back then, such an investor may have been pondering this very same question. Had they answered “yes” to a full two-decade investment time horizon and then actually held for these past 20 years, here’s how that investment would have turned out.

Start date: 08/30/2002
$10,000

08/30/2002
  $183,804

08/29/2022
End date: 08/29/2022
Start price/share: $23.76
End price/share: $255.66
Starting shares: 420.88
Ending shares: 719.46
Dividends reinvested/share: $54.94
Total return: 1,739.38%
Average annual return: 15.66%
Starting investment: $10,000.00
Ending investment: $183,804.52

As we can see, the two-decade investment result worked out exceptionally well, with an annualized rate of return of 15.66%. This would have turned a $10K investment made 20 years ago into $183,804.52 today (as of 08/29/2022). On a total return basis, that’s a result of 1,739.38% (something to think about: how might MCD shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]

Notice that McDonald’s Corp paid investors a total of $54.94/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 5.52/share, we calculate that MCD has a current yield of approximately 2.16%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 5.52 against the original $23.76/share purchase price. This works out to a yield on cost of 9.09%.

More investment wisdom to ponder:
“A market downturn doesn’t bother us. It is an opportunity to increase our ownership of great companies with great management at good prices.” — Warren Buffett