“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”
— 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 twenty year holding period. Suppose such a “buy-and-hold” investor had looked into buying shares of Kellogg Co (NYSE: K) back in 2000. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
|Average annual return:||8.14%|
As shown above, the twenty year investment result worked out well, with an annualized rate of return of 8.14%. This would have turned a $10K investment made 20 years ago into $47,874.00 today (as of 12/10/2020). On a total return basis, that’s a result of 379.18% (something to think about: how might K shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Kellogg Co paid investors a total of $31.73/share in dividends over the 20 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 2.28/share, we calculate that K has a current yield of approximately 3.68%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2.28 against the original $23.44/share purchase price. This works out to a yield on cost of 15.70%.
One more piece of investment wisdom to leave you with:
“The stock market is filled with individuals who know the price of everything, but the value of nothing.” — Phillip Fisher