“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”
— 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 twenty year holding period. Suppose such a “buy-and-hold” investor had looked into buying shares of Public Service Enterprise Group Inc (NYSE: PEG) 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: | 10/03/2002 |
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| End date: | 09/30/2022 | ||||
| Start price/share: | $15.20 | ||||
| End price/share: | $56.23 | ||||
| Starting shares: | 657.89 | ||||
| Ending shares: | 1,449.86 | ||||
| Dividends reinvested/share: | $29.81 | ||||
| Total return: | 715.25% | ||||
| Average annual return: | 11.06% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $81,546.07 | ||||
The above analysis shows the twenty year investment result worked out quite well, with an annualized rate of return of 11.06%. This would have turned a $10K investment made 20 years ago into $81,546.07 today (as of 09/30/2022). On a total return basis, that’s a result of 715.25% (something to think about: how might PEG shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Public Service Enterprise Group Inc paid investors a total of $29.81/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 2.16/share, we calculate that PEG has a current yield of approximately 3.84%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2.16 against the original $15.20/share purchase price. This works out to a yield on cost of 25.26%.
More investment wisdom to ponder:
“If a speculator is correct half of the time, he is hitting a good average. Even being right 3 or 4 times out of 10 should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he is wrong.” — Bernard Baruch
