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“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
$10,000

10/14/2009
$42,784

10/11/2019
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