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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 Etrade Financial Corporation (NASD: ETFC) 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: 03/05/2010
$10,000

03/05/2010
$28,206

03/04/2020
End date: 03/04/2020
Start price/share: $16.60
End price/share: $45.99
Starting shares: 602.41
Ending shares: 613.43
Dividends reinvested/share: $0.84
Total return: 182.12%
Average annual return: 10.92%
Starting investment: $10,000.00
Ending investment: $28,206.24

As we can see, the ten year investment result worked out quite well, with an annualized rate of return of 10.92%. This would have turned a $10K investment made 10 years ago into $28,206.24 today (as of 03/04/2020). On a total return basis, that’s a result of 182.12% (something to think about: how might ETFC shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]

Notice that Etrade Financial Corporation paid investors a total of $0.84/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 .56/share, we calculate that ETFC has a current yield of approximately 1.22%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of .56 against the original $16.60/share purchase price. This works out to a yield on cost of 7.35%.

More investment wisdom to ponder:
“Money is better than poverty, if only for financial reasons.” — Woody Allen