“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 Pentair PLC (NYSE: PNR) 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: | 09/13/1999 |
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| End date: | 09/12/2019 | ||||
| Start price/share: | $15.11 | ||||
| End price/share: | $37.75 | ||||
| Starting shares: | 661.81 | ||||
| Ending shares: | 979.98 | ||||
| Dividends reinvested/share: | $10.40 | ||||
| Total return: | 269.94% | ||||
| Average annual return: | 6.76% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $37,023.94 | ||||
As shown above, the twenty year investment result worked out well, with an annualized rate of return of 6.76%. This would have turned a $10K investment made 20 years ago into $37,023.94 today (as of 09/12/2019). On a total return basis, that’s a result of 269.94% (something to think about: how might PNR shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Pentair PLC paid investors a total of $10.40/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 .72/share, we calculate that PNR has a current yield of approximately 1.91%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of .72 against the original $15.11/share purchase price. This works out to a yield on cost of 12.64%.
Here’s one more great investment quote before you go:
“There’s a virtuous cycle when people have to defend challenges to their ideas. Any gaps in thinking or analysis become clear pretty quickly when smart people ask good, logical questions.” — Joel Greenblatt
