“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 Masco Corp. (NYSE: MAS) back in 2004. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
| Start date: | 01/26/2004 |
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| End date: | 01/25/2024 | ||||
| Start price/share: | $24.36 | ||||
| End price/share: | $67.18 | ||||
| Starting shares: | 410.51 | ||||
| Ending shares: | 634.04 | ||||
| Dividends reinvested/share: | $10.95 | ||||
| Total return: | 325.95% | ||||
| Average annual return: | 7.51% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $42,591.40 | ||||
As we can see, the twenty year investment result worked out well, with an annualized rate of return of 7.51%. This would have turned a $10K investment made 20 years ago into $42,591.40 today (as of 01/25/2024). On a total return basis, that’s a result of 325.95% (something to think about: how might MAS shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Masco Corp. paid investors a total of $10.95/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 1.14/share, we calculate that MAS has a current yield of approximately 1.70%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.14 against the original $24.36/share purchase price. This works out to a yield on cost of 6.98%.
Another great investment quote to think about:
“I rarely think the market is right. I believe non-dividend stocks aren’t much more than baseball cards. They are worth what you can convince someone to pay for it.” — Mark Cuban
