“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”
— 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 PepsiCo Inc (NASD: PEP) 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: | 07/24/2003 |
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| End date: | 07/21/2023 | ||||
| Start price/share: | $46.67 | ||||
| End price/share: | $190.16 | ||||
| Starting shares: | 214.27 | ||||
| Ending shares: | 364.26 | ||||
| Dividends reinvested/share: | $50.50 | ||||
| Total return: | 592.68% | ||||
| Average annual return: | 10.16% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $69,296.10 | ||||
The above analysis shows the twenty year investment result worked out quite well, with an annualized rate of return of 10.16%. This would have turned a $10K investment made 20 years ago into $69,296.10 today (as of 07/21/2023). On a total return basis, that’s a result of 592.68% (something to think about: how might PEP shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that PepsiCo Inc paid investors a total of $50.50/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 5.06/share, we calculate that PEP has a current yield of approximately 2.66%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 5.06 against the original $46.67/share purchase price. This works out to a yield on cost of 5.70%.
Here’s one more great investment quote before you go:
“Go for a business that any idiot can run – because sooner or later, any idiot probably is going to run it.” — Peter Lynch
