“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
— Warren Buffett
The above quote from Warren Buffett is timeless, and brings into focus the choice about time horizon that any investor should think about before buying a stock they are considering. Behind every stock is an actual business; what will that business look like over a two-decade period?
Today, let’s look backwards in time to 2004, and take a look at what happened to investors who asked that very question about Northrop Grumman Corp (NYSE: NOC), by taking a look at the investment outcome over a two-decade holding period.
| Start date: | 10/01/2004 |
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| End date: | 09/30/2024 | ||||
| Start price/share: | $48.52 | ||||
| End price/share: | $528.07 | ||||
| Starting shares: | 206.10 | ||||
| Ending shares: | 314.33 | ||||
| Dividends reinvested/share: | $67.99 | ||||
| Total return: | 1,559.90% | ||||
| Average annual return: | 15.07% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $165,924.43 | ||||
As shown above, the two-decade investment result worked out exceptionally well, with an annualized rate of return of 15.07%. This would have turned a $10K investment made 20 years ago into $165,924.43 today (as of 09/30/2024). On a total return basis, that’s a result of 1,559.90% (something to think about: how might NOC shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Northrop Grumman Corp paid investors a total of $67.99/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 8.24/share, we calculate that NOC has a current yield of approximately 1.56%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 8.24 against the original $48.52/share purchase price. This works out to a yield on cost of 3.22%.
More investment wisdom to ponder:
“Waiting helps you as an investor and a lot of people just can’t stand to wait. If you didn’t get the deferred-gratification gene, you’ve got to work very hard to overcome that.” — Charlie Munger
