Photo credit:

“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


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