“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 Verizon Communications Inc (NYSE: VZ) 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: | 09/09/2011 |
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| End date: | 09/08/2021 | ||||
| Start price/share: | $35.24 | ||||
| End price/share: | $54.91 | ||||
| Starting shares: | 283.77 | ||||
| Ending shares: | 446.28 | ||||
| Dividends reinvested/share: | $22.70 | ||||
| Total return: | 145.05% | ||||
| Average annual return: | 9.37% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $24,501.65 | ||||
As shown above, the ten year investment result worked out well, with an annualized rate of return of 9.37%. This would have turned a $10K investment made 10 years ago into $24,501.65 today (as of 09/08/2021). On a total return basis, that’s a result of 145.05% (something to think about: how might VZ shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Verizon Communications Inc paid investors a total of $22.70/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 2.56/share, we calculate that VZ has a current yield of approximately 4.66%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2.56 against the original $35.24/share purchase price. This works out to a yield on cost of 13.22%.
Here’s one more great investment quote before you go:
“Smart investing doesn’t consist of buying good assets but of buying assets well. This is a very, very important distinction that very, very few people understand.” — Howard Marks
