“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
— 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 two-decade holding period. Suppose such a “buy-and-hold” investor had looked into buying shares of CVS Health Corporation (NYSE: CVS) back in 2001. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
|Average annual return:||6.22%|
The above analysis shows the two-decade investment result worked out well, with an annualized rate of return of 6.22%. This would have turned a $10K investment made 20 years ago into $33,445.78 today (as of 01/27/2021). On a total return basis, that’s a result of 234.64% (something to think about: how might CVS shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that CVS Health Corporation paid investors a total of $16.59/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/share, we calculate that CVS has a current yield of approximately 2.76%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2 against the original $28.83/share purchase price. This works out to a yield on cost of 9.57%.
One more investment quote to leave you with:
“In the long run, we are all dead.” — John Maynard Keynes