“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
— Warren Buffett
One of the most important things investors can learn from Warren Buffett, is about how they approach their time horizon for an investment into a stock under consideration. Because immediately after buying shares of a given stock, investors will then be able to check on the day-to-day (and even minute-by-minute) market value. Some days the stock market will be up, other days down. These daily fluctuations can often distract from the long-term view. Today, we look at the result of a ten year holding period for an investor who was considering International Business Machines Corp (NYSE: IBM) back in 2010, bought the stock, ignored the market’s ups and downs, and simply held through to today.
|Average annual return:||5.23%|
As shown above, the ten year investment result worked out well, with an annualized rate of return of 5.23%. This would have turned a $10K investment made 10 years ago into $16,646.96 today (as of 02/13/2020). On a total return basis, that’s a result of 66.45% (something to think about: how might IBM shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Many investors out there refuse to own any stock that lacks a dividend; in the case of International Business Machines Corp, investors have received $46.76/share in dividends these past 10 years examined in the exercise above. This means total return was driven not just by share price, but also by the dividends received (and what the investor did with those dividends). For this exercise, what we’ve done with the dividends is to assume they are reinvestted — i.e. used to purchase additional shares (the calculations use closing price on ex-date).
Based upon the most recent annualized dividend rate of 6.48/share, we calculate that IBM has a current yield of approximately 4.20%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 6.48 against the original $125.23/share purchase price. This works out to a yield on cost of 3.35%.
One more piece of investment wisdom to leave you with:
“All you need for a lifetime of successful investing is a few big winners, and the pluses from those will overwhelm the minuses from the stocks that don’t work out.” — Peter Lynch