“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
— Warren Buffett
This inspiring quote from Warren Buffett teaches us the importance of considering our investment time horizon when approaching any given investment: Could we envision ourselves holding the stock we are considering for many years? Even a twenty year holding period potentially?
For “buy-and-hold” investors taking a long-term view, what’s important isn’t the short-term stock market fluctuations that will inevitably occur, but what happens over the long haul. Looking back 20 years to 2002, investors considering an investment into shares of Johnson & Johnson (NYSE: JNJ) may have been pondering this very question and thinking about their potential investment result over a full twenty year time horizon. Here’s how that would have worked out.
| Start date: | 12/12/2002 |
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| End date: | 12/09/2022 | ||||
| Start price/share: | $55.05 | ||||
| End price/share: | $175.74 | ||||
| Starting shares: | 181.65 | ||||
| Ending shares: | 313.22 | ||||
| Dividends reinvested/share: | $51.54 | ||||
| Total return: | 450.46% | ||||
| Average annual return: | 8.90% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $55,050.40 | ||||
As we can see, the twenty year investment result worked out well, with an annualized rate of return of 8.90%. This would have turned a $10K investment made 20 years ago into $55,050.40 today (as of 12/09/2022). On a total return basis, that’s a result of 450.46% (something to think about: how might JNJ shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Johnson & Johnson paid investors a total of $51.54/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 4.52/share, we calculate that JNJ has a current yield of approximately 2.57%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 4.52 against the original $55.05/share purchase price. This works out to a yield on cost of 4.67%.
More investment wisdom to ponder:
“There is nothing riskier than the widespread perception that there is no risk.” — Howard Marks
