“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 twenty year holding period. Suppose such a “buy-and-hold” investor had looked into buying shares of Home Depot Inc (NYSE: HD) 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: | 11/04/2002 |
|
|||
End date: | 11/01/2022 | ||||
Start price/share: | $27.21 | ||||
End price/share: | $296.06 | ||||
Starting shares: | 367.51 | ||||
Ending shares: | 573.66 | ||||
Dividends reinvested/share: | $47.54 | ||||
Total return: | 1,598.39% | ||||
Average annual return: | 15.21% | ||||
Starting investment: | $10,000.00 | ||||
Ending investment: | $169,813.42 |
As shown above, the twenty year investment result worked out exceptionally well, with an annualized rate of return of 15.21%. This would have turned a $10K investment made 20 years ago into $169,813.42 today (as of 11/01/2022). On a total return basis, that’s a result of 1,598.39% (something to think about: how might HD shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Home Depot Inc paid investors a total of $47.54/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 7.6/share, we calculate that HD has a current yield of approximately 2.57%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 7.6 against the original $27.21/share purchase price. This works out to a yield on cost of 9.45%.
More investment wisdom to ponder:
“Never is there a better time to buy a stock than when a basically sound company, for whatever reason, temporarily falls out of favor with the investment community.” — Geraldine Weiss