“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 Anthem Inc (NYSE: ANTM) back in 2012. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
| Start date: | 01/20/2012 |
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| End date: | 01/19/2022 | ||||
| Start price/share: | $71.78 | ||||
| End price/share: | $448.29 | ||||
| Starting shares: | 139.31 | ||||
| Ending shares: | 161.84 | ||||
| Dividends reinvested/share: | $26.28 | ||||
| Total return: | 625.52% | ||||
| Average annual return: | 21.90% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $72,528.44 | ||||
As shown above, the ten year investment result worked out exceptionally well, with an annualized rate of return of 21.90%. This would have turned a $10K investment made 10 years ago into $72,528.44 today (as of 01/19/2022). On a total return basis, that’s a result of 625.52% (something to think about: how might ANTM shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Anthem Inc paid investors a total of $26.28/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 4.52/share, we calculate that ANTM has a current yield of approximately 1.01%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 4.52 against the original $71.78/share purchase price. This works out to a yield on cost of 1.41%.
More investment wisdom to ponder:
“There’s a virtuous cycle when people have to defend challenges to their ideas. Any gaps in thinking or analysis become clear pretty quickly when smart people ask good, logical questions.” — Joel Greenblatt
