“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 HollyFrontier Corp (NYSE: HFC) 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: | 02/18/2010 |
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| End date: | 02/14/2020 | ||||
| Start price/share: | $14.22 | ||||
| End price/share: | $43.32 | ||||
| Starting shares: | 703.23 | ||||
| Ending shares: | 1,089.57 | ||||
| Dividends reinvested/share: | $17.06 | ||||
| Total return: | 372.00% | ||||
| Average annual return: | 16.80% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $47,212.70 | ||||
As we can see, the ten year investment result worked out exceptionally well, with an annualized rate of return of 16.80%. This would have turned a $10K investment made 10 years ago into $47,212.70 today (as of 02/14/2020). On a total return basis, that’s a result of 372.00% (something to think about: how might HFC shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that HollyFrontier Corp paid investors a total of $17.06/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 1.4/share, we calculate that HFC has a current yield of approximately 3.23%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.4 against the original $14.22/share purchase price. This works out to a yield on cost of 22.71%.
More investment wisdom to ponder:
“While some might mistakenly consider value investing a mechanical tool for identifying bargains, it is actually a comprehensive investment philosophy that emphasizes the need to perform in-depth fundamental analysis, pursue long-term investment results, limit risk, and resist crowd psychology.” — Seth Klarman
