“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— 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 five year holding period possibly?
Suppose a “buy-and-hold” investor was considering an investment into Pinnacle West Capital Corp (NYSE: PNW) back in 2016: back then, such an investor may have been pondering this very same question. Had they answered “yes” to a full five year investment time horizon and then actually held for these past 5 years, here’s how that investment would have turned out.
| Start date: | 03/22/2016 |
|
|||
| End date: | 03/19/2021 | ||||
| Start price/share: | $72.63 | ||||
| End price/share: | $80.79 | ||||
| Starting shares: | 137.68 | ||||
| Ending shares: | 163.71 | ||||
| Dividends reinvested/share: | $14.39 | ||||
| Total return: | 32.26% | ||||
| Average annual return: | 5.76% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $13,227.38 | ||||
As we can see, the five year investment result worked out well, with an annualized rate of return of 5.76%. This would have turned a $10K investment made 5 years ago into $13,227.38 today (as of 03/19/2021). On a total return basis, that’s a result of 32.26% (something to think about: how might PNW shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Pinnacle West Capital Corp paid investors a total of $14.39/share in dividends over the 5 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 3.32/share, we calculate that PNW has a current yield of approximately 4.11%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 3.32 against the original $72.63/share purchase price. This works out to a yield on cost of 5.66%.
One more investment quote to leave you with:
“Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.” — Warren Buffett
