“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 Johnson & Johnson (NYSE: JNJ) back in 2001. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
| Start date: | 01/25/2001 |
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| End date: | 01/22/2021 | ||||
| Start price/share: | $45.88 | ||||
| End price/share: | $163.55 | ||||
| Starting shares: | 217.96 | ||||
| Ending shares: | 366.92 | ||||
| Dividends reinvested/share: | $44.39 | ||||
| Total return: | 500.10% | ||||
| Average annual return: | 9.37% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $60,003.61 | ||||
The above analysis shows the twenty year investment result worked out well, with an annualized rate of return of 9.37%. This would have turned a $10K investment made 20 years ago into $60,003.61 today (as of 01/22/2021). On a total return basis, that’s a result of 500.10% (something to think about: how might JNJ shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Johnson & Johnson paid investors a total of $44.39/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 4.04/share, we calculate that JNJ has a current yield of approximately 2.47%. 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 $45.88/share purchase price. This works out to a yield on cost of 5.38%.
More investment wisdom to ponder:
“Sentimentality about an investments leads to lack of discipline.” — Sam Zell
