“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 decade-long holding period possibly?
Suppose a “buy-and-hold” investor was considering an investment into Merck & Co Inc (NYSE: MRK) back in 2009: back then, such an investor may have been pondering this very same question. Had they answered “yes” to a full decade-long 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 |
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| End date: | 05/31/2019 | ||||
| Start price/share: | $27.59 | ||||
| End price/share: | $79.21 | ||||
| Starting shares: | 362.45 | ||||
| Ending shares: | 521.94 | ||||
| Dividends reinvested/share: | $17.50 | ||||
| Total return: | 313.42% | ||||
| Average annual return: | 15.25% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $41,327.63 | ||||
As shown above, the decade-long investment result worked out exceptionally well, with an annualized rate of return of 15.25%. This would have turned a $10K investment made 10 years ago into $41,327.63 today (as of 05/31/2019). On a total return basis, that’s a result of 313.42% (something to think about: how might MRK shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Many investors out there refuse to own any stock that lacks a dividend; in the case of Merck & Co Inc, investors have received $17.50/share in dividends these past 10 years examined in the exercise above. This means total return was driven not just by share price, but also by the dividends received (and what the investor did with those dividends). For this exercise, what we’ve done with the dividends is to assume they are reinvestted — i.e. used to purchase additional shares (the calculations use closing price on ex-date).
Based upon the most recent annualized dividend rate of 2.2/share, we calculate that MRK has a current yield of approximately 2.78%. 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 $27.59/share purchase price. This works out to a yield on cost of 10.08%.
Another great investment quote to think about:
“If you have trouble imagining a 20% loss in the stock market, you shouldn’t be in stocks.” — John Bogle
