“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 |
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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