“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
— Warren Buffett
The above quote from Warren Buffett is timeless, and brings into focus the choice about time horizon that any investor should think about before buying a stock they are considering. Behind every stock is an actual business; what will that business look like over a twenty year period?
Today, let’s look backwards in time to 2000, and take a look at what happened to investors who asked that very question about Xcel Energy Inc (NASD: XEL), by taking a look at the investment outcome over a twenty year holding period.
| Start date: | 05/15/2000 |
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| End date: | 05/14/2020 | ||||
| Start price/share: | $22.69 | ||||
| End price/share: | $58.20 | ||||
| Starting shares: | 440.77 | ||||
| Ending shares: | 1,033.60 | ||||
| Dividends reinvested/share: | $22.57 | ||||
| Total return: | 501.56% | ||||
| Average annual return: | 9.38% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $60,143.00 | ||||
As we can see, the twenty year investment result worked out well, with an annualized rate of return of 9.38%. This would have turned a $10K investment made 20 years ago into $60,143.00 today (as of 05/14/2020). On a total return basis, that’s a result of 501.56% (something to think about: how might XEL shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Xcel Energy Inc paid investors a total of $22.57/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 1.72/share, we calculate that XEL has a current yield of approximately 2.96%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.72 against the original $22.69/share purchase price. This works out to a yield on cost of 13.05%.
One more investment quote to leave you with:
“People who invest make money for themselves; people who speculate make money for their brokers.” — Benjamin Graham
