“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 Best Buy Inc (NYSE: BBY) back in 1999. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
| Start date: | 03/29/1999 |
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| End date: | 03/26/2019 | ||||
| Start price/share: | $23.05 | ||||
| End price/share: | $70.50 | ||||
| Starting shares: | 433.84 | ||||
| Ending shares: | 602.88 | ||||
| Dividends reinvested/share: | $12.43 | ||||
| Total return: | 325.03% | ||||
| Average annual return: | 7.50% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $42,486.93 | ||||
As shown above, the twenty year investment result worked out well, with an annualized rate of return of 7.50%. This would have turned a $10K investment made 20 years ago into $42,486.93 today (as of 03/26/2019). On a total return basis, that’s a result of 325.03% (something to think about: how might BBY shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Best Buy Inc paid investors a total of $12.43/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 2/share, we calculate that BBY has a current yield of approximately 2.84%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2 against the original $23.05/share purchase price. This works out to a yield on cost of 12.32%.
Another great investment quote to think about:
“As time goes on, I get more and more convinced that the right method of investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes.” — John Maynard Keynes
