“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
— Warren Buffett
This inspiring quote from Warren Buffett teaches us the importance of considering our investment time horizon when approaching any given investment: Could we envision ourselves holding the stock we are considering for many years? Even a two-decade holding period potentially?
For “buy-and-hold” investors taking a long-term view, what’s important isn’t the short-term stock market fluctuations that will inevitably occur, but what happens over the long haul. Looking back 20 years to 2003, investors considering an investment into shares of Procter & Gamble Company (NYSE: PG) may have been pondering this very question and thinking about their potential investment result over a full two-decade time horizon. Here’s how that would have worked out.
| Start date: | 11/03/2003 |
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| End date: | 11/01/2023 | ||||
| Start price/share: | $48.75 | ||||
| End price/share: | $149.61 | ||||
| Starting shares: | 205.13 | ||||
| Ending shares: | 355.46 | ||||
| Dividends reinvested/share: | $46.67 | ||||
| Total return: | 431.80% | ||||
| Average annual return: | 8.71% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $53,160.45 | ||||
The above analysis shows the two-decade investment result worked out well, with an annualized rate of return of 8.71%. This would have turned a $10K investment made 20 years ago into $53,160.45 today (as of 11/01/2023). On a total return basis, that’s a result of 431.80% (something to think about: how might PG shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Procter & Gamble Company paid investors a total of $46.67/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 3.7628/share, we calculate that PG has a current yield of approximately 2.52%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 3.7628 against the original $48.75/share purchase price. This works out to a yield on cost of 5.17%.
One more piece of investment wisdom to leave you with:
“The ideal business is one that earns very high returns on capital and that keeps using lots of capital at those high returns. That becomes a compounding machine.” — Warren Buffett
