“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 twenty year holding period. Suppose such a “buy-and-hold” investor had looked into buying shares of Devon Energy Corp. (NYSE: DVN) 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: | 11/08/2002 |
|
|||
End date: | 11/07/2022 | ||||
Start price/share: | $22.88 | ||||
End price/share: | $72.04 | ||||
Starting shares: | 437.06 | ||||
Ending shares: | 623.18 | ||||
Dividends reinvested/share: | $15.73 | ||||
Total return: | 348.94% | ||||
Average annual return: | 7.79% | ||||
Starting investment: | $10,000.00 | ||||
Ending investment: | $44,866.94 |
As shown above, the twenty year investment result worked out well, with an annualized rate of return of 7.79%. This would have turned a $10K investment made 20 years ago into $44,866.94 today (as of 11/07/2022). On a total return basis, that’s a result of 348.94% (something to think about: how might DVN shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Devon Energy Corp. paid investors a total of $15.73/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 5.4/share, we calculate that DVN has a current yield of approximately 7.50%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 5.4 against the original $22.88/share purchase price. This works out to a yield on cost of 32.78%.
Another great investment quote to think about:
“Money is better than poverty, if only for financial reasons.” — Woody Allen