“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 Travelers Companies Inc (NYSE: TRV) 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: | 05/04/2012 |
|
|||
| End date: | 05/03/2022 | ||||
| Start price/share: | $64.50 | ||||
| End price/share: | $171.76 | ||||
| Starting shares: | 155.04 | ||||
| Ending shares: | 196.43 | ||||
| Dividends reinvested/share: | $27.32 | ||||
| Total return: | 237.39% | ||||
| Average annual return: | 12.93% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $33,747.22 | ||||
As shown above, the decade-long investment result worked out quite well, with an annualized rate of return of 12.93%. This would have turned a $10K investment made 10 years ago into $33,747.22 today (as of 05/03/2022). On a total return basis, that’s a result of 237.39% (something to think about: how might TRV shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Travelers Companies Inc paid investors a total of $27.32/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 3.72/share, we calculate that TRV has a current yield of approximately 2.17%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 3.72 against the original $64.50/share purchase price. This works out to a yield on cost of 3.36%.
One more piece of investment wisdom to leave you with:
“Buy not on optimism, but on arithmetic.” — Benjamin Graham
