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“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 two-decade holding period. Suppose such a “buy-and-hold” investor had looked into buying shares of Emerson Electric Co. (NYSE: EMR) 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: 05/24/1999
$10,000

05/24/1999
$32,826

05/23/2019
End date: 05/23/2019
Start price/share: $33.66
End price/share: $62.68
Starting shares: 297.09
Ending shares: 524.04
Dividends reinvested/share: $26.09
Total return: 228.47%
Average annual return: 6.12%
Starting investment: $10,000.00
Ending investment: $32,826.72

As we can see, the two-decade investment result worked out well, with an annualized rate of return of 6.12%. This would have turned a $10K investment made 20 years ago into $32,826.72 today (as of 05/23/2019). On a total return basis, that’s a result of 228.47% (something to think about: how might EMR shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]

Notice that Emerson Electric Co. paid investors a total of $26.09/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 1.96/share, we calculate that EMR has a current yield of approximately 3.13%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.96 against the original $33.66/share purchase price. This works out to a yield on cost of 9.30%.

One more piece of investment wisdom to leave you with:
“All you need for a lifetime of successful investing is a few big winners, and the pluses from those will overwhelm the minuses from the stocks that don’t work out.” — Peter Lynch