“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 General Motors Co (NYSE: GM) 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:||10.80%|
As we can see, the decade-long investment result worked out quite well, with an annualized rate of return of 10.80%. This would have turned a $10K investment made 10 years ago into $27,886.73 today (as of 08/06/2021). On a total return basis, that’s a result of 178.82% (something to think about: how might GM shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Beyond share price change, another component of GM’s total return these past 10 years has been the payment by General Motors Co of $9.04/share in dividends to shareholders. Automatic reinvestment of dividends can be a wonderful way to compound returns, and for the above calculations we presume that dividends are reinvested into additional shares of stock. (For the purpose of these calcuations, the closing price on ex-date is used).
Based upon the most recent annualized dividend rate of 1.52/share, we calculate that GM has a current yield of approximately 2.76%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.52 against the original $25.54/share purchase price. This works out to a yield on cost of 10.81%.
Here’s one more great investment quote before you go:
“Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” — Albert Einstein