“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
— Warren Buffett
The above quote from Warren Buffett is timeless, and brings into focus the choice about time horizon that any investor should think about before buying a stock they are considering. Behind every stock is an actual business; what will that business look like over a twenty year period?
Today, let’s look backwards in time to 1999, and take a look at what happened to investors who asked that very question about Sempra Energy (NYSE: SRE), by taking a look at the investment outcome over a twenty year holding period.
| Start date: | 12/09/1999 |
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| End date: | 12/06/2019 | ||||
| Start price/share: | $18.25 | ||||
| End price/share: | $145.84 | ||||
| Starting shares: | 547.95 | ||||
| Ending shares: | 1,102.86 | ||||
| Dividends reinvested/share: | $41.03 | ||||
| Total return: | 1,508.41% | ||||
| Average annual return: | 14.90% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $160,964.87 | ||||
As shown above, the twenty year investment result worked out quite well, with an annualized rate of return of 14.90%. This would have turned a $10K investment made 20 years ago into $160,964.87 today (as of 12/06/2019). On a total return basis, that’s a result of 1,508.41% (something to think about: how might SRE shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Sempra Energy paid investors a total of $41.03/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 3.87/share, we calculate that SRE has a current yield of approximately 2.65%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 3.87 against the original $18.25/share purchase price. This works out to a yield on cost of 14.52%.
Another great investment quote to think about:
“Be fearful when others are greedy; be greedy when others are fearful.” — Warren Buffett
