“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 2012. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
| Start date: | 03/15/2012 |
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| End date: | 03/14/2022 | ||||
| Start price/share: | $9.24 | ||||
| End price/share: | $41.20 | ||||
| Starting shares: | 1,082.25 | ||||
| Ending shares: | 1,254.69 | ||||
| Dividends reinvested/share: | $3.94 | ||||
| Total return: | 416.93% | ||||
| Average annual return: | 17.85% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $51,700.09 | ||||
As we can see, the decade-long investment result worked out exceptionally well, with an annualized rate of return of 17.85%. This would have turned a $10K investment made 10 years ago into $51,700.09 today (as of 03/14/2022). On a total return basis, that’s a result of 416.93% (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.]
Many investors out there refuse to own any stock that lacks a dividend; in the case of Bank of America Corp, investors have received $3.94/share in dividends these past 10 years examined in the exercise above. This means total return was driven not just by share price, but also by the dividends received (and what the investor did with those dividends). For this exercise, what we’ve done with the dividends is to assume they are reinvestted — i.e. used to purchase additional shares (the calculations use closing price on ex-date).
Based upon the most recent annualized dividend rate of .84/share, we calculate that BAC has a current yield of approximately 2.04%. 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 $9.24/share purchase price. This works out to a yield on cost of 22.08%.
Here’s one more great investment quote before you go:
“The emotional burden of trading is substantial; on any given day, I could lose millions of dollars. If you personalize these losses, you can’t trade.” — Bruce Kovner
