“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 PACCAR Inc. (NASD: PCAR) back in 2004: 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: | 03/29/2004 |
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| End date: | 03/27/2024 | ||||
| Start price/share: | $16.57 | ||||
| End price/share: | $124.46 | ||||
| Starting shares: | 603.50 | ||||
| Ending shares: | 1,193.01 | ||||
| Dividends reinvested/share: | $28.62 | ||||
| Total return: | 1,384.82% | ||||
| Average annual return: | 14.44% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $148,551.81 | ||||
The above analysis shows the twenty year investment result worked out quite well, with an annualized rate of return of 14.44%. This would have turned a $10K investment made 20 years ago into $148,551.81 today (as of 03/27/2024). On a total return basis, that’s a result of 1,384.82% (something to think about: how might PCAR shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that PACCAR Inc. paid investors a total of $28.62/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 1.08/share, we calculate that PCAR has a current yield of approximately 0.87%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.08 against the original $16.57/share purchase price. This works out to a yield on cost of 5.25%.
More investment wisdom to ponder:
“You can get in much more trouble with a good idea than a bad idea, because you forget that the good idea has limits.” — Benjamin Graham
