“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 Costco Wholesale Corp (NASD: COST) 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: | 03/12/2010 |
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| End date: | 03/11/2020 | ||||
| Start price/share: | $60.17 | ||||
| End price/share: | $297.43 | ||||
| Starting shares: | 166.20 | ||||
| Ending shares: | 213.99 | ||||
| Dividends reinvested/share: | $34.82 | ||||
| Total return: | 536.47% | ||||
| Average annual return: | 20.32% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $63,620.68 | ||||
As shown above, the ten year investment result worked out exceptionally well, with an annualized rate of return of 20.32%. This would have turned a $10K investment made 10 years ago into $63,620.68 today (as of 03/11/2020). On a total return basis, that’s a result of 536.47% (something to think about: how might COST shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Beyond share price change, another component of COST’s total return these past 10 years has been the payment by Costco Wholesale Corp of $34.82/share in dividends to shareholders. Automatic reinvestment of dividends can be a wonderful way to compound returns, and for the above calculations we presume that dividends are reinvested into additional shares of stock. (For the purpose of these calcuations, the closing price on ex-date is used).
Based upon the most recent annualized dividend rate of 2.6/share, we calculate that COST has a current yield of approximately 0.87%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2.6 against the original $60.17/share purchase price. This works out to a yield on cost of 1.45%.
One more piece of investment wisdom to leave you with:
“It’s not always easy to do what’s not popular, but that’s where you make your money. Buy stocks that look bad to less careful investors and hang on until their real value is recognized.” — John Neff
