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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 twenty year holding period. Suppose such a “buy-and-hold” investor had looked into buying shares of Federal Realty Investment Trust (NYSE: FRT) 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: 06/07/1999
$10,000

06/07/1999
$137,051

06/04/2019
End date: 06/04/2019
Start price/share: $22.75
End price/share: $129.68
Starting shares: 439.56
Ending shares: 1,055.98
Dividends reinvested/share: $54.31
Total return: 1,269.39%
Average annual return: 13.98%
Starting investment: $10,000.00
Ending investment: $137,051.70

As we can see, the twenty year investment result worked out quite well, with an annualized rate of return of 13.98%. This would have turned a $10K investment made 20 years ago into $137,051.70 today (as of 06/04/2019). On a total return basis, that’s a result of 1,269.39% (something to think about: how might FRT shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]

Notice that Federal Realty Investment Trust paid investors a total of $54.31/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 4.08/share, we calculate that FRT has a current yield of approximately 3.15%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 4.08 against the original $22.75/share purchase price. This works out to a yield on cost of 13.85%.

One more investment quote to leave you with:
“Never test the depth of a river with both feet.” — Warren Buffett