“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 PulteGroup Inc (NYSE: PHM) 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: | 07/06/1999 |
|
|||
| End date: | 07/02/2019 | ||||
| Start price/share: | $5.80 | ||||
| End price/share: | $32.46 | ||||
| Starting shares: | 1,724.14 | ||||
| Ending shares: | 1,995.44 | ||||
| Dividends reinvested/share: | $2.94 | ||||
| Total return: | 547.72% | ||||
| Average annual return: | 9.79% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $64,768.95 | ||||
As we can see, the twenty year investment result worked out well, with an annualized rate of return of 9.79%. This would have turned a $10K investment made 20 years ago into $64,768.95 today (as of 07/02/2019). On a total return basis, that’s a result of 547.72% (something to think about: how might PHM shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that PulteGroup Inc paid investors a total of $2.94/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 .44/share, we calculate that PHM has a current yield of approximately 1.36%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of .44 against the original $5.80/share purchase price. This works out to a yield on cost of 23.45%.
One more piece of investment wisdom to leave you with:
“You’ve got to be careful if you don’t know where you’re going, ’cause you might not get there.” — Yogi Berra
