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“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 two-decade holding period. Suppose such a “buy-and-hold” investor had looked into buying shares of T Rowe Price Group Inc. (NASD: TROW) 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: 08/21/2000


End date: 08/19/2020
Start price/share: $21.38
End price/share: $137.14
Starting shares: 467.73
Ending shares: 745.72
Dividends reinvested/share: $29.35
Total return: 922.68%
Average annual return: 12.32%
Starting investment: $10,000.00
Ending investment: $102,224.88

As we can see, the two-decade investment result worked out quite well, with an annualized rate of return of 12.32%. This would have turned a $10K investment made 20 years ago into $102,224.88 today (as of 08/19/2020). On a total return basis, that’s a result of 922.68% (something to think about: how might TROW shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]

Notice that T Rowe Price Group Inc. paid investors a total of $29.35/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 3.6/share, we calculate that TROW has a current yield of approximately 2.63%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 3.6 against the original $21.38/share purchase price. This works out to a yield on cost of 12.30%.

More investment wisdom to ponder:
“It’s not how much money you make, but how much money you keep.” — Robert Kiyosaki