“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 Raytheon Technologies Corp (NYSE: RTX) back in 2003: 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: | 01/10/2003 |
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| End date: | 01/09/2023 | ||||
| Start price/share: | $40.48 | ||||
| End price/share: | $99.60 | ||||
| Starting shares: | 247.04 | ||||
| Ending shares: | 383.45 | ||||
| Dividends reinvested/share: | $26.66 | ||||
| Total return: | 281.91% | ||||
| Average annual return: | 6.93% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $38,221.72 | ||||
As shown above, the twenty year investment result worked out well, with an annualized rate of return of 6.93%. This would have turned a $10K investment made 20 years ago into $38,221.72 today (as of 01/09/2023). On a total return basis, that’s a result of 281.91% (something to think about: how might RTX shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Raytheon Technologies Corp paid investors a total of $26.66/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 2.2/share, we calculate that RTX has a current yield of approximately 2.21%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2.2 against the original $40.48/share purchase price. This works out to a yield on cost of 5.46%.
More investment wisdom to ponder:
“Sentimentality about an investments leads to lack of discipline.” — Sam Zell
