“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
— 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 two-decade holding period possibly?
Suppose a “buy-and-hold” investor was considering an investment into Pioneer Natural Resources Co (NYSE: PXD) back in 2001: back then, such an investor may have been pondering this very same question. Had they answered “yes” to a full two-decade investment time horizon and then actually held for these past 20 years, here’s how that investment would have turned out.
| Start date: | 04/20/2001 |
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| End date: | 04/19/2021 | ||||
| Start price/share: | $17.50 | ||||
| End price/share: | $148.58 | ||||
| Starting shares: | 571.43 | ||||
| Ending shares: | 617.04 | ||||
| Dividends reinvested/share: | $6.24 | ||||
| Total return: | 816.80% | ||||
| Average annual return: | 11.71% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $91,699.73 | ||||
The above analysis shows the two-decade investment result worked out quite well, with an annualized rate of return of 11.71%. This would have turned a $10K investment made 20 years ago into $91,699.73 today (as of 04/19/2021). On a total return basis, that’s a result of 816.80% (something to think about: how might PXD shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Pioneer Natural Resources Co paid investors a total of $6.24/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 2.24/share, we calculate that PXD has a current yield of approximately 1.51%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2.24 against the original $17.50/share purchase price. This works out to a yield on cost of 8.63%.
Here’s one more great investment quote before you go:
“Never is there a better time to buy a stock than when a basically sound company, for whatever reason, temporarily falls out of favor with the investment community.” — Geraldine Weiss
