“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 Digital Realty Trust Inc (NYSE: DLR) 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: | 10/14/2009 |
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| End date: | 10/11/2019 | ||||
| Start price/share: | $46.27 | ||||
| End price/share: | $129.31 | ||||
| Starting shares: | 216.12 | ||||
| Ending shares: | 330.94 | ||||
| Dividends reinvested/share: | $32.47 | ||||
| Total return: | 327.94% | ||||
| Average annual return: | 15.65% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $42,784.20 | ||||
As shown above, the ten year investment result worked out exceptionally well, with an annualized rate of return of 15.65%. This would have turned a $10K investment made 10 years ago into $42,784.20 today (as of 10/11/2019). On a total return basis, that’s a result of 327.94% (something to think about: how might DLR shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Digital Realty Trust Inc paid investors a total of $32.47/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 4.32/share, we calculate that DLR has a current yield of approximately 3.34%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 4.32 against the original $46.27/share purchase price. This works out to a yield on cost of 7.22%.
Another great investment quote to think about:
“Value investing is at its core the marriage of a contrarian streak and a calculator.” — Seth Klarman
