“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 ten year holding period. Suppose such a “buy-and-hold” investor had looked into buying shares of Western Digital Corp (NASD: WDC) back in 2011. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
|Average annual return:||7.78%|
As we can see, the ten year investment result worked out well, with an annualized rate of return of 7.78%. This would have turned a $10K investment made 10 years ago into $21,153.48 today (as of 07/16/2021). On a total return basis, that’s a result of 111.51% (something to think about: how might WDC shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Western Digital Corp paid investors a total of $13.55/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/share, we calculate that WDC has a current yield of approximately 3.12%. 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 $37.73/share purchase price. This works out to a yield on cost of 8.27%.
Here’s one more great investment quote before you go:
“The greater the passive income you can build, the freer you will become.” — Todd Fleming