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“Someone’s sitting in the shade today because someone planted a tree a long time ago.”

— 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 Cintas Corporation (NASD: CTAS) 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: 01/26/2004
$10,000

01/26/2004
  $171,956

01/23/2024
End date: 01/23/2024
Start price/share: $46.03
End price/share: $603.67
Starting shares: 217.25
Ending shares: 284.89
Dividends reinvested/share: $31.61
Total return: 1,619.79%
Average annual return: 15.28%
Starting investment: $10,000.00
Ending investment: $171,956.16

As we can see, the two-decade investment result worked out exceptionally well, with an annualized rate of return of 15.28%. This would have turned a $10K investment made 20 years ago into $171,956.16 today (as of 01/23/2024). On a total return basis, that’s a result of 1,619.79% (something to think about: how might CTAS shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]

Notice that Cintas Corporation paid investors a total of $31.61/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 5.4/share, we calculate that CTAS has a current yield of approximately 0.89%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 5.4 against the original $46.03/share purchase price. This works out to a yield on cost of 1.93%.

Another great investment quote to think about:
“If you can follow only one bit of data, follow the earnings.” — Peter Lynch