“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 decade-long holding period possibly?
Suppose a “buy-and-hold” investor was considering an investment into Citigroup Inc (NYSE: C) back in 2011: back then, such an investor may have been pondering this very same question. Had they answered “yes” to a full decade-long investment time horizon and then actually held for these past 10 years, here’s how that investment would have turned out.
| Start date: | 05/18/2011 |
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| End date: | 05/17/2021 | ||||
| Start price/share: | $41.24 | ||||
| End price/share: | $77.42 | ||||
| Starting shares: | 242.48 | ||||
| Ending shares: | 277.91 | ||||
| Dividends reinvested/share: | $8.21 | ||||
| Total return: | 115.15% | ||||
| Average annual return: | 7.96% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $21,518.45 | ||||
As we can see, the decade-long investment result worked out well, with an annualized rate of return of 7.96%. This would have turned a $10K investment made 10 years ago into $21,518.45 today (as of 05/17/2021). On a total return basis, that’s a result of 115.15% (something to think about: how might C shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Citigroup Inc paid investors a total of $8.21/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 2.04/share, we calculate that C has a current yield of approximately 2.63%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2.04 against the original $41.24/share purchase price. This works out to a yield on cost of 6.38%.
Here’s one more great investment quote before you go:
“Buy not on optimism, but on arithmetic.” — Benjamin Graham
