“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”
— 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 two-decade holding period. Suppose such a “buy-and-hold” investor had looked into buying shares of 3M Co (NYSE: MMM) back in 2002. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
| Start date: | 09/27/2002 |
|
|||
| End date: | 09/26/2022 | ||||
| Start price/share: | $56.28 | ||||
| End price/share: | $113.00 | ||||
| Starting shares: | 177.68 | ||||
| Ending shares: | 301.72 | ||||
| Dividends reinvested/share: | $65.88 | ||||
| Total return: | 240.94% | ||||
| Average annual return: | 6.32% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $34,087.18 | ||||
The above analysis shows the two-decade investment result worked out well, with an annualized rate of return of 6.32%. This would have turned a $10K investment made 20 years ago into $34,087.18 today (as of 09/26/2022). On a total return basis, that’s a result of 240.94% (something to think about: how might MMM shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that 3M Co paid investors a total of $65.88/share in dividends over the 20 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 5.96/share, we calculate that MMM has a current yield of approximately 5.27%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 5.96 against the original $56.28/share purchase price. This works out to a yield on cost of 9.36%.
One more investment quote to leave you with:
“One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute.” — William Feather
