“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 Delta Air Lines Inc (NYSE: DAL) 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: | 04/02/2009 |
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| End date: | 04/01/2019 | ||||
| Start price/share: | $6.45 | ||||
| End price/share: | $52.18 | ||||
| Starting shares: | 1,550.39 | ||||
| Ending shares: | 1,699.00 | ||||
| Dividends reinvested/share: | $4.22 | ||||
| Total return: | 786.54% | ||||
| Average annual return: | 24.38% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $88,667.63 | ||||
The above analysis shows the decade-long investment result worked out exceptionally well, with an annualized rate of return of 24.38%. This would have turned a $10K investment made 10 years ago into $88,667.63 today (as of 04/01/2019). On a total return basis, that’s a result of 786.54% (something to think about: how might DAL shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Delta Air Lines Inc paid investors a total of $4.22/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 1.4/share, we calculate that DAL has a current yield of approximately 2.68%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.4 against the original $6.45/share purchase price. This works out to a yield on cost of 41.55%.
Another great investment quote to think about:
“You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.” — Warren Buffett
