“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 Bank of America Corp (NYSE: BAC) back in 2011. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
| Start date: | 10/12/2011 |
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| End date: | 10/11/2021 | ||||
| Start price/share: | $6.58 | ||||
| End price/share: | $43.78 | ||||
| Starting shares: | 1,519.76 | ||||
| Ending shares: | 1,750.48 | ||||
| Dividends reinvested/share: | $3.54 | ||||
| Total return: | 666.36% | ||||
| Average annual return: | 22.57% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $76,617.18 | ||||
As we can see, the decade-long investment result worked out exceptionally well, with an annualized rate of return of 22.57%. This would have turned a $10K investment made 10 years ago into $76,617.18 today (as of 10/11/2021). On a total return basis, that’s a result of 666.36% (something to think about: how might BAC shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Bank of America Corp paid investors a total of $3.54/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 .84/share, we calculate that BAC has a current yield of approximately 1.92%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of .84 against the original $6.58/share purchase price. This works out to a yield on cost of 29.18%.
One more piece of investment wisdom to leave you with:
“Value investing means really asking what are the best values, and not assuming that because something looks expensive that it is, or assuming that because a stock is down in price and trades at low multiples that it is a bargain.” — Bill Miller
