“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 PPG Industries Inc (NYSE: PPG) 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: | 04/22/1999 |
|
|||
| End date: | 04/18/2019 | ||||
| Start price/share: | $29.09 | ||||
| End price/share: | $119.86 | ||||
| Starting shares: | 343.76 | ||||
| Ending shares: | 579.12 | ||||
| Dividends reinvested/share: | $22.75 | ||||
| Total return: | 594.14% | ||||
| Average annual return: | 10.17% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $69,403.64 | ||||
As shown above, the twenty year investment result worked out quite well, with an annualized rate of return of 10.17%. This would have turned a $10K investment made 20 years ago into $69,403.64 today (as of 04/18/2019). On a total return basis, that’s a result of 594.14% (something to think about: how might PPG shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that PPG Industries Inc paid investors a total of $22.75/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 1.92/share, we calculate that PPG has a current yield of approximately 1.60%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.92 against the original $29.09/share purchase price. This works out to a yield on cost of 5.50%.
One more investment quote to leave you with:
“Every once in a while, the market does something so stupid it takes your breath away.” — Jim Cramer
