“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 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 decade-long holding period. Suppose such a “buy-and-hold” investor had looked into buying shares of Pinnacle West Capital Corp (NYSE: PNW) back in 2010. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
| Start date: | 08/05/2010 |
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| End date: | 08/04/2020 | ||||
| Start price/share: | $39.62 | ||||
| End price/share: | $81.59 | ||||
| Starting shares: | 252.40 | ||||
| Ending shares: | 369.58 | ||||
| Dividends reinvested/share: | $25.02 | ||||
| Total return: | 201.54% | ||||
| Average annual return: | 11.66% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $30,146.62 | ||||
As shown above, the decade-long investment result worked out quite well, with an annualized rate of return of 11.66%. This would have turned a $10K investment made 10 years ago into $30,146.62 today (as of 08/04/2020). On a total return basis, that’s a result of 201.54% (something to think about: how might PNW shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Pinnacle West Capital Corp paid investors a total of $25.02/share in dividends over the 10 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 3.84%. 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 $39.62/share purchase price. This works out to a yield on cost of 9.69%.
Here’s one more great investment quote before you go:
“Experience taught me a few things. One is to listen to your gut, no matter how good something sounds on paper. The second is that you’re generally better off sticking with what you know. And the third is that sometimes your best investments are the ones you don’t make.” — Donald Trump
