“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 Visa Inc (NYSE: V) 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: | 06/03/2009 |
|
|||
| End date: | 05/31/2019 | ||||
| Start price/share: | $17.06 | ||||
| End price/share: | $161.33 | ||||
| Starting shares: | 586.17 | ||||
| Ending shares: | 631.27 | ||||
| Dividends reinvested/share: | $4.63 | ||||
| Total return: | 918.43% | ||||
| Average annual return: | 26.13% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $101,837.50 | ||||
As we can see, the ten year investment result worked out exceptionally well, with an annualized rate of return of 26.13%. This would have turned a $10K investment made 10 years ago into $101,837.50 today (as of 05/31/2019). On a total return basis, that’s a result of 918.43% (something to think about: how might V shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Visa Inc paid investors a total of $4.63/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 1/share, we calculate that V has a current yield of approximately 0.62%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1 against the original $17.06/share purchase price. This works out to a yield on cost of 3.63%.
Another great investment quote to think about:
“All intelligent investing is value investing: acquiring more that you are paying for. You must value the business in order to value the stock.” — Charlie Munger
