“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 Ecolab Inc (NYSE: ECL) 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: | 12/13/1999 |
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| End date: | 12/12/2019 | ||||
| Start price/share: | $16.91 | ||||
| End price/share: | $185.18 | ||||
| Starting shares: | 591.37 | ||||
| Ending shares: | 751.01 | ||||
| Dividends reinvested/share: | $15.49 | ||||
| Total return: | 1,290.71% | ||||
| Average annual return: | 14.06% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $139,089.22 | ||||
As shown above, the two-decade investment result worked out quite well, with an annualized rate of return of 14.06%. This would have turned a $10K investment made 20 years ago into $139,089.22 today (as of 12/12/2019). On a total return basis, that’s a result of 1,290.71% (something to think about: how might ECL shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Beyond share price change, another component of ECL’s total return these past 20 years has been the payment by Ecolab Inc of $15.49/share in dividends to shareholders. Automatic reinvestment of dividends can be a wonderful way to compound returns, and for the above calculations we presume that dividends are reinvested into additional shares of stock. (For the purpose of these calcuations, the closing price on ex-date is used).
Based upon the most recent annualized dividend rate of 1.88/share, we calculate that ECL has a current yield of approximately 1.02%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.88 against the original $16.91/share purchase price. This works out to a yield on cost of 6.03%.
One more piece of investment wisdom to leave you with:
“A 10% decline in the market is fairly common, it happens about once a year. Investors who realize this are less likely to sell in a panic, and more likely to remain invested, benefitting from the wealthbuilding power of stocks.” — Christopher Davis
