“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
— 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 ten year holding period. Suppose such a “buy-and-hold” investor had looked into buying shares of Pinnacle West Capital Corp (NYSE: PNW) back in 2009. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
| Start date: | 03/30/2009 |
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| End date: | 03/28/2019 | ||||
| Start price/share: | $26.01 | ||||
| End price/share: | $95.08 | ||||
| Starting shares: | 384.47 | ||||
| Ending shares: | 586.73 | ||||
| Dividends reinvested/share: | $23.56 | ||||
| Total return: | 457.87% | ||||
| Average annual return: | 18.76% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $55,808.70 | ||||
As shown above, the ten year investment result worked out exceptionally well, with an annualized rate of return of 18.76%. This would have turned a $10K investment made 10 years ago into $55,808.70 today (as of 03/28/2019). On a total return basis, that’s a result of 457.87% (something to think about: how might PNW shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Pinnacle West Capital Corp paid investors a total of $23.56/share in dividends over the 10 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 2.95/share, we calculate that PNW has a current yield of approximately 3.10%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2.95 against the original $26.01/share purchase price. This works out to a yield on cost of 11.92%.
Another great investment quote to think about:
“When the public is most frightened, only the strong are left, and that’s when the market is in the best possible hands.” — Victor Niederhoffer
