“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”
— 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 Microsoft Corporation (NASD: MSFT) back in 2003. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
| Start date: | 09/02/2003 |
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| End date: | 08/29/2023 | ||||
| Start price/share: | $27.26 | ||||
| End price/share: | $328.41 | ||||
| Starting shares: | 366.84 | ||||
| Ending shares: | 585.54 | ||||
| Dividends reinvested/share: | $26.43 | ||||
| Total return: | 1,822.98% | ||||
| Average annual return: | 15.93% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $192,350.18 | ||||
As shown above, the twenty year investment result worked out exceptionally well, with an annualized rate of return of 15.93%. This would have turned a $10K investment made 20 years ago into $192,350.18 today (as of 08/29/2023). On a total return basis, that’s a result of 1,822.98% (something to think about: how might MSFT shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Microsoft Corporation paid investors a total of $26.43/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 2.72/share, we calculate that MSFT has a current yield of approximately 0.83%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2.72 against the original $27.26/share purchase price. This works out to a yield on cost of 3.04%.
One more investment quote to leave you with:
“The underlying principles of sound investment should not alter from decade to decade, but the application of these principles must be adapted to significant changes in the financial mechanisms and climate.” — Benjamin Graham
