“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 Wabtec Corp (NYSE: WAB) 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: | 05/29/2001 |
|
|||
| End date: | 05/26/2021 | ||||
| Start price/share: | $6.60 | ||||
| End price/share: | $81.41 | ||||
| Starting shares: | 1,515.15 | ||||
| Ending shares: | 1,610.25 | ||||
| Dividends reinvested/share: | $3.40 | ||||
| Total return: | 1,210.90% | ||||
| Average annual return: | 13.73% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $131,161.67 | ||||
As shown above, the two-decade investment result worked out quite well, with an annualized rate of return of 13.73%. This would have turned a $10K investment made 20 years ago into $131,161.67 today (as of 05/26/2021). On a total return basis, that’s a result of 1,210.90% (something to think about: how might WAB shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Wabtec Corp paid investors a total of $3.40/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 .48/share, we calculate that WAB has a current yield of approximately 0.59%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of .48 against the original $6.60/share purchase price. This works out to a yield on cost of 8.94%.
One more investment quote to leave you with:
“All intelligent investing is value investing: acquiring more that you are paying for. You must value the business in order to value the stock.” — Charlie Munger
