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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 Hormel Foods Corp. (NYSE: HRL) back in 2010. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:

Start date: 01/25/2010
$10,000

01/25/2010
$58,126

01/22/2020
End date: 01/22/2020
Start price/share: $9.65
End price/share: $46.57
Starting shares: 1,036.27
Ending shares: 1,248.31
Dividends reinvested/share: $5.04
Total return: 481.34%
Average annual return: 19.25%
Starting investment: $10,000.00
Ending investment: $58,126.53

As shown above, the ten year investment result worked out exceptionally well, with an annualized rate of return of 19.25%. This would have turned a $10K investment made 10 years ago into $58,126.53 today (as of 01/22/2020). On a total return basis, that’s a result of 481.34% (something to think about: how might HRL shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]

Notice that Hormel Foods Corp. paid investors a total of $5.04/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 .93/share, we calculate that HRL has a current yield of approximately 2.00%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of .93 against the original $9.65/share purchase price. This works out to a yield on cost of 20.73%.

One more investment quote to leave you with:
“The ideal business is one that earns very high returns on capital and that keeps using lots of capital at those high returns. That becomes a compounding machine.” — Warren Buffett