“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 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 ten year holding period possibly?
Suppose a “buy-and-hold” investor was considering an investment into Applied Materials, Inc. (NASD: AMAT) back in 2009: back then, such an investor may have been pondering this very same question. Had they answered “yes” to a full ten year investment time horizon and then actually held for these past 10 years, here’s how that investment would have turned out.
| Start date: | 04/09/2009 |
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| End date: | 04/08/2019 | ||||
| Start price/share: | $11.45 | ||||
| End price/share: | $42.92 | ||||
| Starting shares: | 873.36 | ||||
| Ending shares: | 1,061.90 | ||||
| Dividends reinvested/share: | $3.91 | ||||
| Total return: | 355.77% | ||||
| Average annual return: | 16.37% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $45,560.74 | ||||
As shown above, the ten year investment result worked out exceptionally well, with an annualized rate of return of 16.37%. This would have turned a $10K investment made 10 years ago into $45,560.74 today (as of 04/08/2019). On a total return basis, that’s a result of 355.77% (something to think about: how might AMAT shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Applied Materials, Inc. paid investors a total of $3.91/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 .84/share, we calculate that AMAT has a current yield of approximately 1.96%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of .84 against the original $11.45/share purchase price. This works out to a yield on cost of 17.12%.
Another great investment quote to think about:
“I make no attempt to forecast the market; my efforts are devoted to finding undervalued securities.” — Warren Buffett
