“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— 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 five year holding period. Suppose such a “buy-and-hold” investor had looked into buying shares of Principal Financial Group Inc (NASD: PFG) back in 2019. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
| Start date: | 12/13/2019 |
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| End date: | 12/12/2024 | ||||
| Start price/share: | $54.29 | ||||
| End price/share: | $79.29 | ||||
| Starting shares: | 184.20 | ||||
| Ending shares: | 223.64 | ||||
| Dividends reinvested/share: | $12.69 | ||||
| Total return: | 77.33% | ||||
| Average annual return: | 12.13% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $17,731.49 | ||||
As shown above, the five year investment result worked out quite well, with an annualized rate of return of 12.13%. This would have turned a $10K investment made 5 years ago into $17,731.49 today (as of 12/12/2024). On a total return basis, that’s a result of 77.33% (something to think about: how might PFG shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Principal Financial Group Inc paid investors a total of $12.69/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 2.92/share, we calculate that PFG has a current yield of approximately 3.68%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2.92 against the original $54.29/share purchase price. This works out to a yield on cost of 6.78%.
One more piece of investment wisdom to leave you with:
“I rarely think the market is right. I believe non-dividend stocks aren’t much more than baseball cards. They are worth what you can convince someone to pay for it.” — Mark Cuban
