“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 Exxon Mobil Corp (NYSE: XOM) back in 2013. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
| Start date: | 02/07/2013 |
|
|||
| End date: | 02/06/2023 | ||||
| Start price/share: | $88.25 | ||||
| End price/share: | $111.73 | ||||
| Starting shares: | 113.31 | ||||
| Ending shares: | 173.21 | ||||
| Dividends reinvested/share: | $31.26 | ||||
| Total return: | 93.53% | ||||
| Average annual return: | 6.82% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $19,346.58 | ||||
As shown above, the ten year investment result worked out well, with an annualized rate of return of 6.82%. This would have turned a $10K investment made 10 years ago into $19,346.58 today (as of 02/06/2023). On a total return basis, that’s a result of 93.53% (something to think about: how might XOM shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Exxon Mobil Corp paid investors a total of $31.26/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 3.64/share, we calculate that XOM has a current yield of approximately 3.26%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 3.64 against the original $88.25/share purchase price. This works out to a yield on cost of 3.69%.
One more piece of investment wisdom to leave you with:
“If a speculator is correct half of the time, he is hitting a good average. Even being right 3 or 4 times out of 10 should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he is wrong.” — Bernard Baruch
