Photo credit: commons.wikimedia.org

“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 Stanley Black & Decker Inc (NYSE: SWK) back in 2002. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:

Start date: 03/25/2002
$10,000

03/25/2002
$51,426

03/23/2022
End date: 03/23/2022
Start price/share: $44.15
End price/share: $141.28
Starting shares: 226.50
Ending shares: 364.06
Dividends reinvested/share: $36.41
Total return: 414.34%
Average annual return: 8.53%
Starting investment: $10,000.00
Ending investment: $51,426.96

As we can see, the two-decade investment result worked out well, with an annualized rate of return of 8.53%. This would have turned a $10K investment made 20 years ago into $51,426.96 today (as of 03/23/2022). On a total return basis, that’s a result of 414.34% (something to think about: how might SWK shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]

Notice that Stanley Black & Decker Inc paid investors a total of $36.41/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 3.16/share, we calculate that SWK has a current yield of approximately 2.24%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 3.16 against the original $44.15/share purchase price. This works out to a yield on cost of 5.07%.

Here’s one more great investment quote before you go:
“The four most dangerous words in investing are: ‘this time it’s different.'” — Sir John Templeton