“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 Mastercard Inc (NYSE: MA) back in 2010. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
|Average annual return:||31.24%|
As we can see, the ten year investment result worked out exceptionally well, with an annualized rate of return of 31.24%. This would have turned a $10K investment made 10 years ago into $151,587.09 today (as of 10/15/2020). On a total return basis, that’s a result of 1,415.67% (something to think about: how might MA shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Mastercard Inc paid investors a total of $7.02/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 1.6/share, we calculate that MA has a current yield of approximately 0.47%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.6 against the original $23.55/share purchase price. This works out to a yield on cost of 2.00%.
Here’s one more great investment quote before you go:
“Wide diversification is only required when investors do not understand what they are doing.” — Warren Buffett