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“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”

— 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 twenty year holding period. Suppose such a “buy-and-hold” investor had looked into buying shares of Realty Income Corp (NYSE: O) back in 1999. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:

Start date: 07/19/1999
$10,000

07/19/1999
$193,505

07/17/2019
End date: 07/17/2019
Start price/share: $11.69
End price/share: $69.92
Starting shares: 855.43
Ending shares: 2,768.64
Dividends reinvested/share: $34.74
Total return: 1,835.83%
Average annual return: 15.96%
Starting investment: $10,000.00
Ending investment: $193,505.22

As we can see, the twenty year investment result worked out exceptionally well, with an annualized rate of return of 15.96%. This would have turned a $10K investment made 20 years ago into $193,505.22 today (as of 07/17/2019). On a total return basis, that’s a result of 1,835.83% (something to think about: how might O shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]

Notice that Realty Income Corp paid investors a total of $34.74/share in dividends over the 20 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 2.718/share, we calculate that O has a current yield of approximately 3.89%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2.718 against the original $11.69/share purchase price. This works out to a yield on cost of 33.28%.

Another great investment quote to think about:
“All the opportunity in the world means nothing if you don’t actually pull the trigger.” — Sam Zell