“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:
|Average annual return:||11.55%|
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