“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
— Warren Buffett
One of the most important things investors can learn from Warren Buffett, is about how they approach their time horizon for an investment into a stock under consideration. Because immediately after buying shares of a given stock, investors will then be able to check on the day-to-day (and even minute-by-minute) market value. Some days the stock market will be up, other days down. These daily fluctuations can often distract from the long-term view. Today, we look at the result of a ten year holding period for an investor who was considering Alliance Data Systems Corp. (NYSE: ADS) back in 2009, bought the stock, ignored the market’s ups and downs, and simply held through to today.
| Start date: | 11/27/2009 |
|
|||
| End date: | 11/26/2019 | ||||
| Start price/share: | $61.71 | ||||
| End price/share: | $106.05 | ||||
| Starting shares: | 162.05 | ||||
| Ending shares: | 168.82 | ||||
| Dividends reinvested/share: | $7.40 | ||||
| Total return: | 79.04% | ||||
| Average annual return: | 6.00% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $17,911.34 | ||||
The above analysis shows the ten year investment result worked out well, with an annualized rate of return of 6.00%. This would have turned a $10K investment made 10 years ago into $17,911.34 today (as of 11/26/2019). On a total return basis, that’s a result of 79.04% (something to think about: how might ADS shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Alliance Data Systems Corp. paid investors a total of $7.40/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 2.52/share, we calculate that ADS has a current yield of approximately 2.38%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2.52 against the original $61.71/share purchase price. This works out to a yield on cost of 3.86%.
More investment wisdom to ponder:
“I think you have to learn that there’s a company behind every stock, and that there’s only one real reason why stocks go up. Companies go from doing poorly to doing well or small companies grow to large companies.” — Peter Lynch
