“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”
— 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 twenty year holding period possibly?
Suppose a “buy-and-hold” investor was considering an investment into Chubb Ltd (NYSE: CB) back in 2000: back then, such an investor may have been pondering this very same question. Had they answered “yes” to a full twenty year investment time horizon and then actually held for these past 20 years, here’s how that investment would have turned out.
| Start date: | 01/18/2000 |
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| End date: | 01/14/2020 | ||||
| Start price/share: | $9.59 | ||||
| End price/share: | $150.76 | ||||
| Starting shares: | 1,042.75 | ||||
| Ending shares: | 1,595.07 | ||||
| Dividends reinvested/share: | $29.86 | ||||
| Total return: | 2,304.73% | ||||
| Average annual return: | 17.23% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $240,416.60 | ||||
The above analysis shows the twenty year investment result worked out exceptionally well, with an annualized rate of return of 17.23%. This would have turned a $10K investment made 20 years ago into $240,416.60 today (as of 01/14/2020). On a total return basis, that’s a result of 2,304.73% (something to think about: how might CB shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Chubb Ltd paid investors a total of $29.86/share in dividends over the 20 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 3/share, we calculate that CB has a current yield of approximately 1.99%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 3 against the original $9.59/share purchase price. This works out to a yield on cost of 20.75%.
One more investment quote to leave you with:
“As in roulette, same is true of the stock trader, who will find that the expense of trading weights the dice heavily against him.” — Benjamin Graham
