“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 Deere & Co. (NYSE: DE) back in 2003. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
| Start date: | 02/27/2003 |
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| End date: | 02/24/2023 | ||||
| Start price/share: | $20.82 | ||||
| End price/share: | $417.42 | ||||
| Starting shares: | 480.31 | ||||
| Ending shares: | 713.82 | ||||
| Dividends reinvested/share: | $39.05 | ||||
| Total return: | 2,879.63% | ||||
| Average annual return: | 18.49% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $297,877.52 | ||||
As we can see, the twenty year investment result worked out exceptionally well, with an annualized rate of return of 18.49%. This would have turned a $10K investment made 20 years ago into $297,877.52 today (as of 02/24/2023). On a total return basis, that’s a result of 2,879.63% (something to think about: how might DE shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Deere & Co. paid investors a total of $39.05/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/share, we calculate that DE has a current yield of approximately 1.20%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 5 against the original $20.82/share purchase price. This works out to a yield on cost of 5.76%.
More investment wisdom to ponder:
“Every once in a while, the market does something so stupid it takes your breath away.” — Jim Cramer
