“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 Johnson & Johnson (NYSE: JNJ) 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: | 11/09/2010 |
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| End date: | 11/06/2020 | ||||
| Start price/share: | $64.31 | ||||
| End price/share: | $142.25 | ||||
| Starting shares: | 155.50 | ||||
| Ending shares: | 208.83 | ||||
| Dividends reinvested/share: | $30.22 | ||||
| Total return: | 197.06% | ||||
| Average annual return: | 11.50% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $29,699.47 | ||||
As we can see, the decade-long investment result worked out quite well, with an annualized rate of return of 11.50%. This would have turned a $10K investment made 10 years ago into $29,699.47 today (as of 11/06/2020). On a total return basis, that’s a result of 197.06% (something to think about: how might JNJ shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Johnson & Johnson paid investors a total of $30.22/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 4.04/share, we calculate that JNJ has a current yield of approximately 2.84%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 4.04 against the original $64.31/share purchase price. This works out to a yield on cost of 4.42%.
Another great investment quote to think about:
“Markets can remain irrational longer than you can remain solvent.” — John Maynard Keynes
