“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”
— Warren Buffett
Investors can learn a lot from Warren Buffett, whose above quote teaches the importance of thinking about investment time horizon, and asking ourselves before buying any given stock: can we envision holding onto it for years — even a two-decade holding period possibly?
Suppose a “buy-and-hold” investor was considering an investment into Exelon Corp (NASD: EXC) back in 2000: back then, such an investor may have been pondering this very same question. Had they answered “yes” to a full two-decade investment time horizon and then actually held for these past 20 years, here’s how that investment would have turned out.
| Start date: | 08/14/2000 |
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| End date: | 08/12/2020 | ||||
| Start price/share: | $24.03 | ||||
| End price/share: | $38.71 | ||||
| Starting shares: | 416.15 | ||||
| Ending shares: | 866.95 | ||||
| Dividends reinvested/share: | $29.62 | ||||
| Total return: | 235.60% | ||||
| Average annual return: | 6.24% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $33,572.01 | ||||
The above analysis shows the two-decade investment result worked out well, with an annualized rate of return of 6.24%. This would have turned a $10K investment made 20 years ago into $33,572.01 today (as of 08/12/2020). On a total return basis, that’s a result of 235.60% (something to think about: how might EXC shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Exelon Corp paid investors a total of $29.62/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 1.53/share, we calculate that EXC has a current yield of approximately 3.95%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.53 against the original $24.03/share purchase price. This works out to a yield on cost of 16.44%.
One more piece of investment wisdom to leave you with:
“When everyone is going right, look left.” — Sam Zell
