Photo credit: commons.wikimedia.org

“I buy on the assumption that they could close the market the next day and not reopen it for five years.”

— 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 five year holding period possibly?

Suppose a “buy-and-hold” investor was considering an investment into Pinnacle West Capital Corp (NYSE: PNW) back in 2014: back then, such an investor may have been pondering this very same question. Had they answered “yes” to a full five year investment time horizon and then actually held for these past 5 years, here’s how that investment would have turned out.

Start date: 04/15/2014
$10,000

04/15/2014
$20,458

04/12/2019
End date: 04/12/2019
Start price/share: $55.63
End price/share: $95.31
Starting shares: 179.76
Ending shares: 214.64
Dividends reinvested/share: $12.89
Total return: 104.58%
Average annual return: 15.41%
Starting investment: $10,000.00
Ending investment: $20,458.61

The above analysis shows the five year investment result worked out exceptionally well, with an annualized rate of return of 15.41%. This would have turned a $10K investment made 5 years ago into $20,458.61 today (as of 04/12/2019). On a total return basis, that’s a result of 104.58% (something to think about: how might PNW shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]

Notice that Pinnacle West Capital Corp paid investors a total of $12.89/share in dividends over the 5 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 2.95/share, we calculate that PNW has a current yield of approximately 3.10%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2.95 against the original $55.63/share purchase price. This works out to a yield on cost of 5.57%.

One more piece of investment wisdom to leave you with:
“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