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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 AvalonBay Communities, Inc. (NYSE: AVB) 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: 05/01/2009
$10,000

05/01/2009
$51,656

04/30/2019
End date: 04/30/2019
Start price/share: $54.06
End price/share: $200.93
Starting shares: 184.98
Ending shares: 257.03
Dividends reinvested/share: $46.10
Total return: 416.46%
Average annual return: 17.84%
Starting investment: $10,000.00
Ending investment: $51,656.22

As shown above, the decade-long investment result worked out exceptionally well, with an annualized rate of return of 17.84%. This would have turned a $10K investment made 10 years ago into $51,656.22 today (as of 04/30/2019). On a total return basis, that’s a result of 416.46% (something to think about: how might AVB shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]

Notice that AvalonBay Communities, Inc. paid investors a total of $46.10/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 6.08/share, we calculate that AVB has a current yield of approximately 3.03%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 6.08 against the original $54.06/share purchase price. This works out to a yield on cost of 5.60%.

More investment wisdom to ponder:
“Though tempting, trying to time the market is a loser’s game.” — Christopher Davis