“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 Texas Instruments Inc. (NASD: TXN) 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: | 10/15/2012 |
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| End date: | 10/13/2022 | ||||
| Start price/share: | $28.22 | ||||
| End price/share: | $154.34 | ||||
| Starting shares: | 354.36 | ||||
| Ending shares: | 462.26 | ||||
| Dividends reinvested/share: | $24.90 | ||||
| Total return: | 613.45% | ||||
| Average annual return: | 21.71% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $71,328.42 | ||||
The above analysis shows the ten year investment result worked out exceptionally well, with an annualized rate of return of 21.71%. This would have turned a $10K investment made 10 years ago into $71,328.42 today (as of 10/13/2022). On a total return basis, that’s a result of 613.45% (something to think about: how might TXN shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Texas Instruments Inc. paid investors a total of $24.90/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 4.96/share, we calculate that TXN has a current yield of approximately 3.21%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 4.96 against the original $28.22/share purchase price. This works out to a yield on cost of 11.37%.
Here’s one more great investment quote before you go:
“The ideal business is one that earns very high returns on capital and that keeps using lots of capital at those high returns. That becomes a compounding machine.” — Warren Buffett
