“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 General Motors Co (NYSE: GM) 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: | 04/04/2012 |
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| End date: | 04/01/2022 | ||||
| Start price/share: | $25.10 | ||||
| End price/share: | $42.96 | ||||
| Starting shares: | 398.41 | ||||
| Ending shares: | 515.37 | ||||
| Dividends reinvested/share: | $9.04 | ||||
| Total return: | 121.40% | ||||
| Average annual return: | 8.27% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $22,130.28 | ||||
The above analysis shows the ten year investment result worked out well, with an annualized rate of return of 8.27%. This would have turned a $10K investment made 10 years ago into $22,130.28 today (as of 04/01/2022). On a total return basis, that’s a result of 121.40% (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.]
Notice that General Motors Co paid investors a total of $9.04/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 1.52/share, we calculate that GM has a current yield of approximately 3.54%. 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 $25.10/share purchase price. This works out to a yield on cost of 14.10%.
Here’s one more great investment quote before you go:
“Markets can remain irrational longer than you can remain solvent.” — John Maynard Keynes
