“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
— Warren Buffett
Investors can learn a lot from Warren Buffett, whose above quote teaches the importance of thinking about investment time horizon, and asking ourselves before buying any given stock: can we envision holding onto it for years — even a ten year holding period possibly?
Suppose a “buy-and-hold” investor was considering an investment into Southern Company (NYSE: SO) back in 2009: back then, such an investor may have been pondering this very same question. Had they answered “yes” to a full ten year investment time horizon and then actually held for these past 10 years, here’s how that investment would have turned out.
| Start date: | 12/03/2009 |
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| End date: | 12/02/2019 | ||||
| Start price/share: | $33.13 | ||||
| End price/share: | $61.60 | ||||
| Starting shares: | 301.84 | ||||
| Ending shares: | 482.37 | ||||
| Dividends reinvested/share: | $21.23 | ||||
| Total return: | 197.14% | ||||
| Average annual return: | 11.50% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $29,708.33 | ||||
As shown above, the ten year investment result worked out quite well, with an annualized rate of return of 11.50%. This would have turned a $10K investment made 10 years ago into $29,708.33 today (as of 12/02/2019). On a total return basis, that’s a result of 197.14% (something to think about: how might SO shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Beyond share price change, another component of SO’s total return these past 10 years has been the payment by Southern Company of $21.23/share in dividends to shareholders. Automatic reinvestment of dividends can be a wonderful way to compound returns, and for the above calculations we presume that dividends are reinvested into additional shares of stock. (For the purpose of these calcuations, the closing price on ex-date is used).
Based upon the most recent annualized dividend rate of 2.48/share, we calculate that SO has a current yield of approximately 4.03%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2.48 against the original $33.13/share purchase price. This works out to a yield on cost of 12.16%.
Another great investment quote to think about:
“If you have trouble imagining a 20% loss in the stock market, you shouldn’t be in stocks.” — John Bogle
