“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
— Warren Buffett
Investors can learn a lot from Warren Buffett, whose above quote teaches the importance of thinking about investment time horizon, and asking ourselves before buying any given stock: can we envision holding onto it for years — even a ten year holding period possibly?
Suppose a “buy-and-hold” investor was considering an investment into PPL Corp (NYSE: PPL) back in 2009: back then, such an investor may have been pondering this very same question. Had they answered “yes” to a full ten year investment time horizon and then actually held for these past 10 years, here’s how that investment would have turned out.
| Start date: | 09/24/2009 |
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| End date: | 09/23/2019 | ||||
| Start price/share: | $28.44 | ||||
| End price/share: | $31.59 | ||||
| Starting shares: | 351.62 | ||||
| Ending shares: | 572.14 | ||||
| Dividends reinvested/share: | $14.48 | ||||
| Total return: | 80.74% | ||||
| Average annual return: | 6.10% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $18,081.08 | ||||
As shown above, the ten year investment result worked out well, with an annualized rate of return of 6.10%. This would have turned a $10K investment made 10 years ago into $18,081.08 today (as of 09/23/2019). On a total return basis, that’s a result of 80.74% (something to think about: how might PPL shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that PPL Corp paid investors a total of $14.48/share in dividends over the 10 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 1.65/share, we calculate that PPL has a current yield of approximately 5.22%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.65 against the original $28.44/share purchase price. This works out to a yield on cost of 18.35%.
One more investment quote to leave you with:
“Behind every stock is a company. Find out what it’s doing.” — Peter Lynch
