“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
— 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 Applied Materials, Inc. (NASD: AMAT) back in 2003. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
|Average annual return:||11.72%|
As we can see, the twenty year investment result worked out quite well, with an annualized rate of return of 11.72%. This would have turned a $10K investment made 20 years ago into $91,864.14 today (as of 09/18/2023). On a total return basis, that’s a result of 818.82% (something to think about: how might AMAT shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Applied Materials, Inc. paid investors a total of $9.07/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 1.28/share, we calculate that AMAT has a current yield of approximately 0.91%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.28 against the original $20.48/share purchase price. This works out to a yield on cost of 4.44%.
Another great investment quote to think about:
“Value investing is at its core the marriage of a contrarian streak and a calculator.” — Seth Klarman