“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 Tiffany & Co. (NYSE: TIF) 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: | 05/15/2009 |
|
|||
| End date: | 05/14/2019 | ||||
| Start price/share: | $25.48 | ||||
| End price/share: | $98.34 | ||||
| Starting shares: | 392.46 | ||||
| Ending shares: | 476.84 | ||||
| Dividends reinvested/share: | $14.63 | ||||
| Total return: | 368.92% | ||||
| Average annual return: | 16.71% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $46,909.90 | ||||
As we can see, the decade-long investment result worked out exceptionally well, with an annualized rate of return of 16.71%. This would have turned a $10K investment made 10 years ago into $46,909.90 today (as of 05/14/2019). On a total return basis, that’s a result of 368.92% (something to think about: how might TIF shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Tiffany & Co. paid investors a total of $14.63/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 2.2/share, we calculate that TIF has a current yield of approximately 2.24%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2.2 against the original $25.48/share purchase price. This works out to a yield on cost of 8.79%.
Another great investment quote to think about:
“In the short run, the market is a voting machine but in the long run, it is a weighing machine.” — Benjamin Graham
