“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 Principal Financial Group Inc (NASD: PFG) 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: | 07/26/2002 |
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| End date: | 07/25/2022 | ||||
| Start price/share: | $26.00 | ||||
| End price/share: | $64.91 | ||||
| Starting shares: | 384.62 | ||||
| Ending shares: | 651.93 | ||||
| Dividends reinvested/share: | $24.06 | ||||
| Total return: | 323.17% | ||||
| Average annual return: | 7.48% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $42,354.20 | ||||
As we can see, the two-decade investment result worked out well, with an annualized rate of return of 7.48%. This would have turned a $10K investment made 20 years ago into $42,354.20 today (as of 07/25/2022). On a total return basis, that’s a result of 323.17% (something to think about: how might PFG shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Principal Financial Group Inc paid investors a total of $24.06/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 2.56/share, we calculate that PFG has a current yield of approximately 3.94%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2.56 against the original $26.00/share purchase price. This works out to a yield on cost of 15.15%.
Another great investment quote to think about:
“The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.” — Warren Buffett
