“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
— Warren Buffett
The above quote from Warren Buffett is timeless, and brings into focus the choice about time horizon that any investor should think about before buying a stock they are considering. Behind every stock is an actual business; what will that business look like over a ten year period?
Today, let’s look backwards in time to 2012, and take a look at what happened to investors who asked that very question about Illinois Tool Works, Inc. (NYSE: ITW), by taking a look at the investment outcome over a ten year holding period.
| Start date: | 05/07/2012 |
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| End date: | 05/04/2022 | ||||
| Start price/share: | $56.76 | ||||
| End price/share: | $213.01 | ||||
| Starting shares: | 176.18 | ||||
| Ending shares: | 221.80 | ||||
| Dividends reinvested/share: | $29.92 | ||||
| Total return: | 372.46% | ||||
| Average annual return: | 16.80% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $47,232.80 | ||||
As shown above, the ten year investment result worked out exceptionally well, with an annualized rate of return of 16.80%. This would have turned a $10K investment made 10 years ago into $47,232.80 today (as of 05/04/2022). On a total return basis, that’s a result of 372.46% (something to think about: how might ITW shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Illinois Tool Works, Inc. paid investors a total of $29.92/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 4.88/share, we calculate that ITW has a current yield of approximately 2.29%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 4.88 against the original $56.76/share purchase price. This works out to a yield on cost of 4.03%.
Another great investment quote to think about:
“Sentimentality about an investments leads to lack of discipline.” — Sam Zell
