“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”
— 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 twenty year period?
Today, let’s look backwards in time to 1999, and take a look at what happened to investors who asked that very question about General Dynamics Corp (NYSE: GD), by taking a look at the investment outcome over a twenty year holding period.
| Start date: | 12/06/1999 |
|
|||
| End date: | 12/04/2019 | ||||
| Start price/share: | $25.50 | ||||
| End price/share: | $178.08 | ||||
| Starting shares: | 392.16 | ||||
| Ending shares: | 580.64 | ||||
| Dividends reinvested/share: | $35.08 | ||||
| Total return: | 934.01% | ||||
| Average annual return: | 12.38% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $103,323.04 | ||||
As shown above, the twenty year investment result worked out quite well, with an annualized rate of return of 12.38%. This would have turned a $10K investment made 20 years ago into $103,323.04 today (as of 12/04/2019). On a total return basis, that’s a result of 934.01% (something to think about: how might GD shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that General Dynamics Corp paid investors a total of $35.08/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 4.08/share, we calculate that GD has a current yield of approximately 2.29%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 4.08 against the original $25.50/share purchase price. This works out to a yield on cost of 8.98%.
One more piece of investment wisdom to leave you with:
“If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.” — Peter Lynch
