“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 Chubb Ltd (NYSE: CB), by taking a look at the investment outcome over a two-decade holding period.
| Start date: | 07/29/2002 |
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| End date: | 07/27/2022 | ||||
| Start price/share: | $14.52 | ||||
| End price/share: | $187.00 | ||||
| Starting shares: | 688.71 | ||||
| Ending shares: | 1,062.17 | ||||
| Dividends reinvested/share: | $37.06 | ||||
| Total return: | 1,886.25% | ||||
| Average annual return: | 16.11% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $198,575.51 | ||||
As we can see, the two-decade investment result worked out exceptionally well, with an annualized rate of return of 16.11%. This would have turned a $10K investment made 20 years ago into $198,575.51 today (as of 07/27/2022). On a total return basis, that’s a result of 1,886.25% (something to think about: how might CB shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Chubb Ltd paid investors a total of $37.06/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 3.32/share, we calculate that CB has a current yield of approximately 1.78%. 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 $14.52/share purchase price. This works out to a yield on cost of 12.26%.
One more investment quote to leave you with:
“The idea that a bell rings to signal when to get into or out of the stock market is simply not credible. After nearly fifty years in this business, I don’t know anybody who has done it successfully and consistently.” — Jack Bogle
