“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 Pinnacle West Capital Corp (NYSE: PNW) back in 2000. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
| Start date: | 03/23/2000 |
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| End date: | 03/20/2020 | ||||
| Start price/share: | $27.06 | ||||
| End price/share: | $65.55 | ||||
| Starting shares: | 369.52 | ||||
| Ending shares: | 886.50 | ||||
| Dividends reinvested/share: | $43.05 | ||||
| Total return: | 481.10% | ||||
| Average annual return: | 9.20% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $58,151.04 | ||||
As we can see, the twenty year investment result worked out well, with an annualized rate of return of 9.20%. This would have turned a $10K investment made 20 years ago into $58,151.04 today (as of 03/20/2020). On a total return basis, that’s a result of 481.10% (something to think about: how might PNW shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Pinnacle West Capital Corp paid investors a total of $43.05/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 3.13/share, we calculate that PNW has a current yield of approximately 4.78%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 3.13 against the original $27.06/share purchase price. This works out to a yield on cost of 17.66%.
One more investment quote to leave you with:
“Calling someone who trades actively in the market an investor is like calling someone who repeatedly engages in one-night stands a romantic.” — Warren Buffett
