“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
— Warren Buffett
The above quote from Warren Buffett is timeless, and brings into focus the choice about time horizon that any investor should think about before buying a stock they are considering. Behind every stock is an actual business; what will that business look like over a two-decade period?
Today, let’s look backwards in time to 2002, and take a look at what happened to investors who asked that very question about Ecolab Inc (NYSE: ECL), by taking a look at the investment outcome over a two-decade holding period.
| Start date: | 02/25/2002 |
|
|||
| End date: | 02/24/2022 | ||||
| Start price/share: | $22.55 | ||||
| End price/share: | $175.94 | ||||
| Starting shares: | 443.46 | ||||
| Ending shares: | 558.14 | ||||
| Dividends reinvested/share: | $19.24 | ||||
| Total return: | 881.99% | ||||
| Average annual return: | 12.09% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $98,147.80 | ||||
As we can see, the two-decade investment result worked out quite well, with an annualized rate of return of 12.09%. This would have turned a $10K investment made 20 years ago into $98,147.80 today (as of 02/24/2022). On a total return basis, that’s a result of 881.99% (something to think about: how might ECL shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Ecolab Inc paid investors a total of $19.24/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 2.04/share, we calculate that ECL has a current yield of approximately 1.16%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2.04 against the original $22.55/share purchase price. This works out to a yield on cost of 5.14%.
Here’s one more great investment quote before you go:
“Wide diversification is only required when investors do not understand what they are doing.” — Warren Buffett
