“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”
— 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 two-decade holding period. Suppose such a “buy-and-hold” investor had looked into buying shares of PepsiCo Inc (NASD: PEP) back in 2004. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
| Start date: | 01/16/2004 |
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| End date: | 01/12/2024 | ||||
| Start price/share: | $45.39 | ||||
| End price/share: | $167.27 | ||||
| Starting shares: | 220.31 | ||||
| Ending shares: | 377.39 | ||||
| Dividends reinvested/share: | $52.71 | ||||
| Total return: | 531.26% | ||||
| Average annual return: | 9.65% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $63,136.77 | ||||
As shown above, the two-decade investment result worked out well, with an annualized rate of return of 9.65%. This would have turned a $10K investment made 20 years ago into $63,136.77 today (as of 01/12/2024). On a total return basis, that’s a result of 531.26% (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 $52.71/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 5.06/share, we calculate that PEP has a current yield of approximately 3.03%. 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 $45.39/share purchase price. This works out to a yield on cost of 6.68%.
Another great investment quote to think about:
“I made my money by selling too soon.” — Bernard Baruch
