“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 General Dynamics Corp (NYSE: GD) 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: | 08/12/2002 |
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| End date: | 08/10/2022 | ||||
| Start price/share: | $41.93 | ||||
| End price/share: | $230.46 | ||||
| Starting shares: | 238.49 | ||||
| Ending shares: | 364.33 | ||||
| Dividends reinvested/share: | $46.42 | ||||
| Total return: | 739.63% | ||||
| Average annual return: | 11.22% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $83,953.23 | ||||
The above analysis shows the two-decade investment result worked out quite well, with an annualized rate of return of 11.22%. This would have turned a $10K investment made 20 years ago into $83,953.23 today (as of 08/10/2022). On a total return basis, that’s a result of 739.63% (something to think about: how might GD shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that General Dynamics Corp paid investors a total of $46.42/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 5.04/share, we calculate that GD has a current yield of approximately 2.19%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 5.04 against the original $41.93/share purchase price. This works out to a yield on cost of 5.22%.
More investment wisdom to ponder:
“Most investors want to do today what they should have done yesterday.” — Larry Summers
