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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

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
$10,000

06/03/2009
$101,837

05/31/2019
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