“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
— Warren Buffett
Investors can learn a lot from Warren Buffett, whose above quote teaches the importance of thinking about investment time horizon, and asking ourselves before buying any given stock: can we envision holding onto it for years — even a ten year holding period possibly?
Suppose a “buy-and-hold” investor was considering an investment into CF Industries Holdings Inc (NYSE: CF) back in 2010: back then, such an investor may have been pondering this very same question. Had they answered “yes” to a full ten year investment time horizon and then actually held for these past 10 years, here’s how that investment would have turned out.
| Start date: | 12/30/2010 |
|
|||
| End date: | 12/29/2020 | ||||
| Start price/share: | $27.33 | ||||
| End price/share: | $36.95 | ||||
| Starting shares: | 365.90 | ||||
| Ending shares: | 466.11 | ||||
| Dividends reinvested/share: | $9.16 | ||||
| Total return: | 72.23% | ||||
| Average annual return: | 5.58% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $17,216.54 | ||||
The above analysis shows the ten year investment result worked out well, with an annualized rate of return of 5.58%. This would have turned a $10K investment made 10 years ago into $17,216.54 today (as of 12/29/2020). On a total return basis, that’s a result of 72.23% (something to think about: how might CF shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that CF Industries Holdings Inc paid investors a total of $9.16/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 1.2/share, we calculate that CF has a current yield of approximately 3.25%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.2 against the original $27.33/share purchase price. This works out to a yield on cost of 11.89%.
Here’s one more great investment quote before you go:
“The older I get, the more I see a straight path where I want to go. If you’re going to hunt elephants, don’t get off the trail for a rabbit.” — T. Boone Pickens
