Photo credit: commons.wikimedia.org

“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 Marsh & McLennan Companies Inc. (NYSE: MMC) 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: 08/03/2009
$10,000

08/03/2009
$60,155

07/31/2019
End date: 07/31/2019
Start price/share: $20.90
End price/share: $98.80
Starting shares: 478.47
Ending shares: 608.65
Dividends reinvested/share: $11.56
Total return: 501.34%
Average annual return: 19.66%
Starting investment: $10,000.00
Ending investment: $60,155.65

As shown above, the decade-long investment result worked out exceptionally well, with an annualized rate of return of 19.66%. This would have turned a $10K investment made 10 years ago into $60,155.65 today (as of 07/31/2019). On a total return basis, that’s a result of 501.34% (something to think about: how might MMC shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]

Notice that Marsh & McLennan Companies Inc. paid investors a total of $11.56/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 1.82/share, we calculate that MMC has a current yield of approximately 1.84%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.82 against the original $20.90/share purchase price. This works out to a yield on cost of 8.80%.

One more piece of investment wisdom to leave you with:
“A 10% decline in the market is fairly common, it happens about once a year. Investors who realize this are less likely to sell in a panic, and more likely to remain invested, benefitting from the wealthbuilding power of stocks.” — Christopher Davis