“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 Standard and Poors Global Inc (NYSE: SPGI) 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: | 09/24/1999 |
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| End date: | 09/23/2019 | ||||
| Start price/share: | $48.25 | ||||
| End price/share: | $252.46 | ||||
| Starting shares: | 207.25 | ||||
| Ending shares: | 308.31 | ||||
| Dividends reinvested/share: | $25.40 | ||||
| Total return: | 678.35% | ||||
| Average annual return: | 10.80% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $77,854.43 | ||||
As we can see, the two-decade investment result worked out quite well, with an annualized rate of return of 10.80%. This would have turned a $10K investment made 20 years ago into $77,854.43 today (as of 09/23/2019). On a total return basis, that’s a result of 678.35% (something to think about: how might SPGI shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Standard and Poors Global Inc paid investors a total of $25.40/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 2.28/share, we calculate that SPGI has a current yield of approximately 0.90%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2.28 against the original $48.25/share purchase price. This works out to a yield on cost of 1.87%.
One more investment quote to leave you with:
“October is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” — Mark Twain
