“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 Capital One Financial Corp (NYSE: COF) 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: | 10/08/2009 |
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| End date: | 10/07/2019 | ||||
| Start price/share: | $37.47 | ||||
| End price/share: | $86.88 | ||||
| Starting shares: | 266.88 | ||||
| Ending shares: | 306.07 | ||||
| Dividends reinvested/share: | $10.30 | ||||
| Total return: | 165.92% | ||||
| Average annual return: | 10.27% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $26,588.27 | ||||
As shown above, the decade-long investment result worked out quite well, with an annualized rate of return of 10.27%. This would have turned a $10K investment made 10 years ago into $26,588.27 today (as of 10/07/2019). On a total return basis, that’s a result of 165.92% (something to think about: how might COF shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Capital One Financial Corp paid investors a total of $10.30/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 1.6/share, we calculate that COF 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 1.6 against the original $37.47/share purchase price. This works out to a yield on cost of 4.91%.
More investment wisdom to ponder:
“It’s not how much money you make, but how much money you keep.” — Robert Kiyosaki
