“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
— Warren Buffett
This inspiring quote from Warren Buffett teaches us the importance of considering our investment time horizon when approaching any given investment: Could we envision ourselves holding the stock we are considering for many years? Even a decade-long holding period potentially?
For “buy-and-hold” investors taking a long-term view, what’s important isn’t the short-term stock market fluctuations that will inevitably occur, but what happens over the long haul. Looking back 10 years to 2010, investors considering an investment into shares of Illinois Tool Works, Inc. (NYSE: ITW) may have been pondering this very question and thinking about their potential investment result over a full decade-long time horizon. Here’s how that would have worked out.
| Start date: | 04/27/2010 |
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| End date: | 04/24/2020 | ||||
| Start price/share: | $50.98 | ||||
| End price/share: | $158.23 | ||||
| Starting shares: | 196.16 | ||||
| Ending shares: | 249.73 | ||||
| Dividends reinvested/share: | $23.38 | ||||
| Total return: | 295.15% | ||||
| Average annual return: | 14.73% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $39,515.72 | ||||
As we can see, the decade-long investment result worked out quite well, with an annualized rate of return of 14.73%. This would have turned a $10K investment made 10 years ago into $39,515.72 today (as of 04/24/2020). On a total return basis, that’s a result of 295.15% (something to think about: how might ITW shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Illinois Tool Works, Inc. paid investors a total of $23.38/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 4.28/share, we calculate that ITW has a current yield of approximately 2.70%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 4.28 against the original $50.98/share purchase price. This works out to a yield on cost of 5.30%.
More investment wisdom to ponder:
“If you’re prepared to invest in a company, then you ought to be able to explain why in simple language that a fifth grader could understand, and quickly enough so the fifth grader won’t get bored.” — Peter Lynch
