“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 Paychex Inc (NASD: PAYX) 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: | 08/16/2010 |
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| End date: | 08/13/2020 | ||||
| Start price/share: | $25.02 | ||||
| End price/share: | $74.47 | ||||
| Starting shares: | 399.68 | ||||
| Ending shares: | 567.27 | ||||
| Dividends reinvested/share: | $17.41 | ||||
| Total return: | 322.45% | ||||
| Average annual return: | 15.50% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $42,249.33 | ||||
The above analysis shows the ten year investment result worked out exceptionally well, with an annualized rate of return of 15.50%. This would have turned a $10K investment made 10 years ago into $42,249.33 today (as of 08/13/2020). On a total return basis, that’s a result of 322.45% (something to think about: how might PAYX shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Paychex Inc paid investors a total of $17.41/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 2.48/share, we calculate that PAYX has a current yield of approximately 3.33%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2.48 against the original $25.02/share purchase price. This works out to a yield on cost of 13.31%.
More investment wisdom to ponder:
“If you have trouble imagining a 20% loss in the stock market, you shouldn’t be in stocks.” — John Bogle
