“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— 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 five year holding period. Suppose such a “buy-and-hold” investor had looked into buying shares of Public Service Enterprise Group Inc (NYSE: PEG) back in 2015. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
| Start date: | 06/11/2015 |
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| End date: | 06/10/2020 | ||||
| Start price/share: | $40.40 | ||||
| End price/share: | $52.20 | ||||
| Starting shares: | 247.52 | ||||
| Ending shares: | 296.31 | ||||
| Dividends reinvested/share: | $8.80 | ||||
| Total return: | 54.67% | ||||
| Average annual return: | 9.11% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $15,467.73 | ||||
The above analysis shows the five year investment result worked out well, with an annualized rate of return of 9.11%. This would have turned a $10K investment made 5 years ago into $15,467.73 today (as of 06/10/2020). On a total return basis, that’s a result of 54.67% (something to think about: how might PEG shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Public Service Enterprise Group Inc paid investors a total of $8.80/share in dividends over the 5 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 1.96/share, we calculate that PEG has a current yield of approximately 3.75%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.96 against the original $40.40/share purchase price. This works out to a yield on cost of 9.28%.
Here’s one more great investment quote before you go:
“In the long run, we are all dead.” — John Maynard Keynes
