“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 ten year holding period. Suppose such a “buy-and-hold” investor had looked into buying shares of Cisco Systems Inc (NASD: CSCO) back in 2012. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
|Average annual return:||11.25%|
As shown above, the ten year investment result worked out quite well, with an annualized rate of return of 11.25%. This would have turned a $10K investment made 10 years ago into $29,040.24 today (as of 09/29/2022). On a total return basis, that’s a result of 190.46% (something to think about: how might CSCO shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Cisco Systems Inc paid investors a total of $11.16/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 1.52/share, we calculate that CSCO has a current yield of approximately 3.75%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.52 against the original $19.04/share purchase price. This works out to a yield on cost of 19.70%.
One more piece of investment wisdom to leave you with:
“I make no attempt to forecast the market; my efforts are devoted to finding undervalued securities.” — Warren Buffett