Photo credit: commons.wikimedia.org

“Someone’s sitting in the shade today because someone planted a tree a long time ago.”

— Warren Buffett

Investors can learn a lot from Warren Buffett, whose above quote teaches the importance of thinking about investment time horizon, and asking ourselves before buying any given stock: can we envision holding onto it for years — even a two-decade holding period possibly?

Suppose a “buy-and-hold” investor was considering an investment into eBay Inc. (NASD: EBAY) back in 2004: back then, such an investor may have been pondering this very same question. Had they answered “yes” to a full two-decade investment time horizon and then actually held for these past 20 years, here’s how that investment would have turned out.

Start date: 08/26/2004
$10,000

08/26/2004
  $35,514

08/23/2024
End date: 08/23/2024
Start price/share: $18.19
End price/share: $58.88
Starting shares: 549.75
Ending shares: 602.98
Dividends reinvested/share: $4.34
Total return: 255.04%
Average annual return: 6.54%
Starting investment: $10,000.00
Ending investment: $35,514.41

As we can see, the two-decade investment result worked out well, with an annualized rate of return of 6.54%. This would have turned a $10K investment made 20 years ago into $35,514.41 today (as of 08/23/2024). On a total return basis, that’s a result of 255.04% (something to think about: how might EBAY 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 EBAY’s total return these past 20 years has been the payment by eBay Inc. of $4.34/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 1.08/share, we calculate that EBAY has a current yield of approximately 1.83%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.08 against the original $18.19/share purchase price. This works out to a yield on cost of 10.06%.

More investment wisdom to ponder:
“Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected.” — George Soros