“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
— Warren Buffett
The above quote from Warren Buffett is timeless, and brings into focus the choice about time horizon that any investor should think about before buying a stock they are considering. Behind every stock is an actual business; what will that business look like over a ten year period?
Today, let’s look backwards in time to 2010, and take a look at what happened to investors who asked that very question about Johnson & Johnson (NYSE: JNJ), by taking a look at the investment outcome over a ten year holding period.
| Start date: | 03/17/2010 |
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| End date: | 03/16/2020 | ||||
| Start price/share: | $64.65 | ||||
| End price/share: | $127.13 | ||||
| Starting shares: | 154.68 | ||||
| Ending shares: | 208.74 | ||||
| Dividends reinvested/share: | $29.28 | ||||
| Total return: | 165.37% | ||||
| Average annual return: | 10.25% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $26,547.17 | ||||
The above analysis shows the ten year investment result worked out quite well, with an annualized rate of return of 10.25%. This would have turned a $10K investment made 10 years ago into $26,547.17 today (as of 03/16/2020). On a total return basis, that’s a result of 165.37% (something to think about: how might JNJ shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Johnson & Johnson paid investors a total of $29.28/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 3.8/share, we calculate that JNJ has a current yield of approximately 2.99%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 3.8 against the original $64.65/share purchase price. This works out to a yield on cost of 4.62%.
More investment wisdom to ponder:
“This company looks cheap, that company looks cheap, but the overall economy could completely screw it up. The key is to wait. Sometimes the hardest thing to do is to do nothing.” — David Tepper
