Photo credit:

“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 Northrop Grumman Corp (NYSE: NOC) back in 2011: 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: 04/27/2011


End date: 04/26/2021
Start price/share: $62.90
End price/share: $337.80
Starting shares: 158.98
Ending shares: 196.58
Dividends reinvested/share: $36.22
Total return: 564.05%
Average annual return: 20.83%
Starting investment: $10,000.00
Ending investment: $66,404.58

As we can see, the ten year investment result worked out exceptionally well, with an annualized rate of return of 20.83%. This would have turned a $10K investment made 10 years ago into $66,404.58 today (as of 04/26/2021). On a total return basis, that’s a result of 564.05% (something to think about: how might NOC shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]

Notice that Northrop Grumman Corp paid investors a total of $36.22/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 5.8/share, we calculate that NOC has a current yield of approximately 1.72%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 5.8 against the original $62.90/share purchase price. This works out to a yield on cost of 2.73%.

More investment wisdom to ponder:
“You can get in much more trouble with a good idea than a bad idea, because you forget that the good idea has limits.” — Benjamin Graham