“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 1999, and take a look at what happened to investors who asked that very question about McKesson Corp (NYSE: MCK), by taking a look at the investment outcome over a two-decade holding period.
| Start date: | 12/13/1999 |
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| End date: | 12/10/2019 | ||||
| Start price/share: | $20.50 | ||||
| End price/share: | $142.75 | ||||
| Starting shares: | 487.80 | ||||
| Ending shares: | 571.30 | ||||
| Dividends reinvested/share: | $13.36 | ||||
| Total return: | 715.53% | ||||
| Average annual return: | 11.06% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $81,546.07 | ||||
As we can see, the two-decade investment result worked out quite well, with an annualized rate of return of 11.06%. This would have turned a $10K investment made 20 years ago into $81,546.07 today (as of 12/10/2019). On a total return basis, that’s a result of 715.53% (something to think about: how might MCK shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Beyond share price change, another component of MCK’s total return these past 20 years has been the payment by McKesson Corp of $13.36/share in dividends to shareholders. Automatic reinvestment of dividends can be a wonderful way to compound returns, and for the above calculations we presume that dividends are reinvested into additional shares of stock. (For the purpose of these calcuations, the closing price on ex-date is used).
Based upon the most recent annualized dividend rate of 1.64/share, we calculate that MCK has a current yield of approximately 1.15%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.64 against the original $20.50/share purchase price. This works out to a yield on cost of 5.61%.
One more piece of investment wisdom to leave you with:
“Buy not on optimism, but on arithmetic.” — Benjamin Graham
