“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
— Warren Buffett
A critical pearl of wisdom from Warren Buffett teaches us that with any potential stock investment we may make, as soon as our buy order is filled we will have a choice: to remain a co-owner of that company for the long haul, or to react to the inevitable short-term ups and downs that the stock market is famous for (sometimes sharp ups and downs).
The reality of this choice forces us to challenge our confidence in any given company we might invest into, and keep our eyes on the long-term time horizon. The market may go up and down the interim, but over a ten year holding period, will the investment succeed?
Back in 2012, investors may have been asking themselves that very question about Bank of America Corp (NYSE: BAC). Let’s examine what would have happened over a ten year holding period, had you invested in BAC shares back in 2012 and held on.
|Average annual return:||19.10%|
As shown above, the ten year investment result worked out exceptionally well, with an annualized rate of return of 19.10%. This would have turned a $10K investment made 10 years ago into $57,399.70 today (as of 06/08/2022). On a total return basis, that’s a result of 474.02% (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 $4.14/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 2.34%. 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 $7.28/share purchase price. This works out to a yield on cost of 32.14%.
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