“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
— Warren Buffett
Investors can learn a lot from Warren Buffett, whose above quote teaches the importance of thinking about investment time horizon, and asking ourselves before buying any given stock: can we envision holding onto it for years — even a twenty year holding period possibly?
Suppose a “buy-and-hold” investor was considering an investment into Lowe’s Companies Inc (NYSE: LOW) back in 2002: back then, such an investor may have been pondering this very same question. Had they answered “yes” to a full twenty year investment time horizon and then actually held for these past 20 years, here’s how that investment would have turned out.
| Start date: | 12/20/2002 |
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| End date: | 12/19/2022 | ||||
| Start price/share: | $19.18 | ||||
| End price/share: | $203.17 | ||||
| Starting shares: | 521.38 | ||||
| Ending shares: | 695.33 | ||||
| Dividends reinvested/share: | $20.71 | ||||
| Total return: | 1,312.71% | ||||
| Average annual return: | 14.15% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $141,301.96 | ||||
The above analysis shows the twenty year investment result worked out quite well, with an annualized rate of return of 14.15%. This would have turned a $10K investment made 20 years ago into $141,301.96 today (as of 12/19/2022). On a total return basis, that’s a result of 1,312.71% (something to think about: how might LOW shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Lowe’s Companies Inc paid investors a total of $20.71/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 4.2/share, we calculate that LOW has a current yield of approximately 2.07%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 4.2 against the original $19.18/share purchase price. This works out to a yield on cost of 10.79%.
One more piece of investment wisdom to leave you with:
“A stock is not just a ticker symbol or an electronic blip; it is an ownership interest in an actual business, with an underlying value that does not depend on its share price.” — Benjamin Graham
