“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 Merck & Co Inc (NYSE: MRK) back in 2010: 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: | 01/07/2010 |
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| End date: | 01/06/2020 | ||||
| Start price/share: | $37.72 | ||||
| End price/share: | $91.64 | ||||
| Starting shares: | 265.11 | ||||
| Ending shares: | 375.49 | ||||
| Dividends reinvested/share: | $18.07 | ||||
| Total return: | 244.10% | ||||
| Average annual return: | 13.15% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $34,410.63 | ||||
As we can see, the ten year investment result worked out quite well, with an annualized rate of return of 13.15%. This would have turned a $10K investment made 10 years ago into $34,410.63 today (as of 01/06/2020). On a total return basis, that’s a result of 244.10% (something to think about: how might MRK shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Merck & Co Inc paid investors a total of $18.07/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 2.44/share, we calculate that MRK has a current yield of approximately 2.66%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2.44 against the original $37.72/share purchase price. This works out to a yield on cost of 7.05%.
More investment wisdom to ponder:
“If you have more than 120 or 130 I.Q. points, you can afford to give the rest away. You don’t need extraordinary intelligence to succeed as an investor.” — Warren Buffett
