“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”
— Warren Buffett
One of the most important things investors can learn from Warren Buffett, is about how they approach their time horizon for an investment into a stock under consideration. Because immediately after buying shares of a given stock, investors will then be able to check on the day-to-day (and even minute-by-minute) market value. Some days the stock market will be up, other days down. These daily fluctuations can often distract from the long-term view. Today, we look at the result of a twenty year holding period for an investor who was considering International Business Machines Corp (NYSE: IBM) back in 2002, bought the stock, ignored the market’s ups and downs, and simply held through to today.
|Average annual return:||5.72%|
As we can see, the twenty year investment result worked out well, with an annualized rate of return of 5.72%. This would have turned a $10K investment made 20 years ago into $30,437.42 today (as of 09/08/2022). On a total return basis, that’s a result of 204.34% (something to think about: how might IBM shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that International Business Machines Corp paid investors a total of $69.70/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 6.6/share, we calculate that IBM has a current yield of approximately 5.14%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 6.6 against the original $71.22/share purchase price. This works out to a yield on cost of 7.22%.
Here’s one more great investment quote before you go:
“All intelligent investing is value investing: acquiring more that you are paying for. You must value the business in order to value the stock.” — Charlie Munger