“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
— 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 decade-long holding period. Suppose such a “buy-and-hold” investor had looked into buying shares of Costco Wholesale Corp (NASD: COST) back in 2011. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
| Start date: | 04/05/2011 |
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| End date: | 04/01/2021 | ||||
| Start price/share: | $74.93 | ||||
| End price/share: | $354.94 | ||||
| Starting shares: | 133.46 | ||||
| Ending shares: | 175.46 | ||||
| Dividends reinvested/share: | $46.80 | ||||
| Total return: | 522.78% | ||||
| Average annual return: | 20.08% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $62,300.15 | ||||
As shown above, the decade-long investment result worked out exceptionally well, with an annualized rate of return of 20.08%. This would have turned a $10K investment made 10 years ago into $62,300.15 today (as of 04/01/2021). On a total return basis, that’s a result of 522.78% (something to think about: how might COST shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Many investors out there refuse to own any stock that lacks a dividend; in the case of Costco Wholesale Corp, investors have received $46.80/share in dividends these past 10 years examined in the exercise above. This means total return was driven not just by share price, but also by the dividends received (and what the investor did with those dividends). For this exercise, what we’ve done with the dividends is to assume they are reinvestted — i.e. used to purchase additional shares (the calculations use closing price on ex-date).
Based upon the most recent annualized dividend rate of 2.8/share, we calculate that COST has a current yield of approximately 0.79%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2.8 against the original $74.93/share purchase price. This works out to a yield on cost of 1.05%.
One more piece of investment wisdom to leave you with:
“This company looks cheap, that company looks cheap, but the overall economy could completely screw it up. The key is to wait. Sometimes the hardest thing to do is to do nothing.” — David Tepper
