“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 ten year holding period. Suppose such a “buy-and-hold” investor had looked into buying shares of Cisco Systems Inc (NASD: CSCO) 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: | 08/28/2009 |
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| End date: | 08/27/2019 | ||||
| Start price/share: | $22.00 | ||||
| End price/share: | $46.79 | ||||
| Starting shares: | 454.55 | ||||
| Ending shares: | 578.49 | ||||
| Dividends reinvested/share: | $7.18 | ||||
| Total return: | 170.67% | ||||
| Average annual return: | 10.47% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $27,074.60 | ||||
As we can see, the ten year investment result worked out quite well, with an annualized rate of return of 10.47%. This would have turned a $10K investment made 10 years ago into $27,074.60 today (as of 08/27/2019). On a total return basis, that’s a result of 170.67% (something to think about: how might CSCO shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Cisco Systems Inc paid investors a total of $7.18/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 1.4/share, we calculate that CSCO has a current yield of approximately 2.99%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.4 against the original $22.00/share purchase price. This works out to a yield on cost of 13.59%.
More investment wisdom to ponder:
“If you are not willing to own a stock for 10 years, do not even think about owning it for 10 minutes.” — Warren Buffett
