“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 2011, investors considering an investment into shares of Merck & Co Inc (NYSE: MRK) 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: | 01/06/2011 |
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| End date: | 01/05/2021 | ||||
| Start price/share: | $37.06 | ||||
| End price/share: | $81.10 | ||||
| Starting shares: | 269.83 | ||||
| Ending shares: | 378.06 | ||||
| Dividends reinvested/share: | $19.03 | ||||
| Total return: | 206.60% | ||||
| Average annual return: | 11.85% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $30,663.83 | ||||
The above analysis shows the decade-long investment result worked out quite well, with an annualized rate of return of 11.85%. This would have turned a $10K investment made 10 years ago into $30,663.83 today (as of 01/05/2021). On a total return basis, that’s a result of 206.60% (something to think about: how might MRK shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Merck & Co Inc paid investors a total of $19.03/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 2.6/share, we calculate that MRK has a current yield of approximately 3.21%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2.6 against the original $37.06/share purchase price. This works out to a yield on cost of 8.66%.
Another great investment quote to think about:
“Don’t look for the needle in the haystack, just buy the haystack.” — John Bogle
