Photo credit: commons.wikimedia.org

“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 Goldman Sachs Group Inc (the (NYSE: GS) 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: 06/25/2010
$10,000

06/25/2010
$16,417

06/24/2020
End date: 06/24/2020
Start price/share: $139.66
End price/share: $198.02
Starting shares: 71.60
Ending shares: 82.88
Dividends reinvested/share: $26.02
Total return: 64.11%
Average annual return: 5.08%
Starting investment: $10,000.00
Ending investment: $16,417.94

As we can see, the ten year investment result worked out well, with an annualized rate of return of 5.08%. This would have turned a $10K investment made 10 years ago into $16,417.94 today (as of 06/24/2020). On a total return basis, that’s a result of 64.11% (something to think about: how might GS shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]

Notice that Goldman Sachs Group Inc (the paid investors a total of $26.02/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 5/share, we calculate that GS has a current yield of approximately 2.52%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 5 against the original $139.66/share purchase price. This works out to a yield on cost of 1.80%.

One more investment quote to leave you with:
“Finding the best person or the best organization to invest your money is one of the most important financial decisions you’ll ever make.” — Bill Gross