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“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 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 decade-long holding period. Suppose such a “buy-and-hold” investor had looked into buying shares of Amgen Inc (NASD: AMGN) back in 2009. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:

Start date: 03/13/2009
$10,000

03/13/2009
$42,892

03/12/2019
End date: 03/12/2019
Start price/share: $51.25
End price/share: $184.18
Starting shares: 195.12
Ending shares: 232.78
Dividends reinvested/share: $24.81
Total return: 328.74%
Average annual return: 15.67%
Starting investment: $10,000.00
Ending investment: $42,892.42

The above analysis shows the decade-long investment result worked out exceptionally well, with an annualized rate of return of 15.67%. This would have turned a $10K investment made 10 years ago into $42,892.42 today (as of 03/12/2019). On a total return basis, that’s a result of 328.74% (something to think about: how might AMGN shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]

Notice that Amgen Inc paid investors a total of $24.81/share in dividends over the 10 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 5.8/share, we calculate that AMGN has a current yield of approximately 3.15%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 5.8 against the original $51.25/share purchase price. This works out to a yield on cost of 6.15%.

Another great investment quote to think about:
“Waiting helps you as an investor and a lot of people just can’t stand to wait. If you didn’t get the deferred-gratification gene, you’ve got to work very hard to overcome that.” — Charlie Munger