“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
— Warren Buffett
Investors can learn a lot from Warren Buffett, whose above quote teaches the importance of thinking about investment time horizon, and asking ourselves before buying any given stock: can we envision holding onto it for years — even a decade-long holding period possibly?
Suppose a “buy-and-hold” investor was considering an investment into Phillips 66 (NYSE: PSX) back in 2012: back then, such an investor may have been pondering this very same question. Had they answered “yes” to a full decade-long investment time horizon and then actually held for these past 10 years, here’s how that investment would have turned out.
| Start date: | 08/17/2012 |
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| End date: | 08/16/2022 | ||||
| Start price/share: | $42.77 | ||||
| End price/share: | $89.36 | ||||
| Starting shares: | 233.81 | ||||
| Ending shares: | 323.33 | ||||
| Dividends reinvested/share: | $26.54 | ||||
| Total return: | 188.93% | ||||
| Average annual return: | 11.19% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $28,892.39 | ||||
As we can see, the decade-long investment result worked out quite well, with an annualized rate of return of 11.19%. This would have turned a $10K investment made 10 years ago into $28,892.39 today (as of 08/16/2022). On a total return basis, that’s a result of 188.93% (something to think about: how might PSX shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Phillips 66 paid investors a total of $26.54/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 3.88/share, we calculate that PSX has a current yield of approximately 4.34%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 3.88 against the original $42.77/share purchase price. This works out to a yield on cost of 10.15%.
One more piece of investment wisdom to leave you with:
“Cash is a fact, profit is an opinion.” — Alfred Rappaport
