“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 Illinois Tool Works, Inc. (NYSE: ITW) back in 2001. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
| Start date: | 02/01/2001 |
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| End date: | 01/29/2021 | ||||
| Start price/share: | $33.50 | ||||
| End price/share: | $194.21 | ||||
| Starting shares: | 298.51 | ||||
| Ending shares: | 458.78 | ||||
| Dividends reinvested/share: | $33.82 | ||||
| Total return: | 791.00% | ||||
| Average annual return: | 11.55% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $89,053.62 | ||||
The above analysis shows the twenty year investment result worked out quite well, with an annualized rate of return of 11.55%. This would have turned a $10K investment made 20 years ago into $89,053.62 today (as of 01/29/2021). On a total return basis, that’s a result of 791.00% (something to think about: how might ITW shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Illinois Tool Works, Inc. paid investors a total of $33.82/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 4.56/share, we calculate that ITW has a current yield of approximately 2.35%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 4.56 against the original $33.50/share purchase price. This works out to a yield on cost of 7.01%.
One more investment quote to leave you with:
“The function of economic forecasting is to make astrology look respectable.” — John Galbraith
