“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 Parker Hannifin Corp (NYSE: PH) back in 2013. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
|Average annual return:||16.07%|
As shown above, the ten year investment result worked out exceptionally well, with an annualized rate of return of 16.07%. This would have turned a $10K investment made 10 years ago into $44,345.06 today (as of 02/15/2023). On a total return basis, that’s a result of 343.51% (something to think about: how might PH shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Parker Hannifin Corp paid investors a total of $31.28/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 5.32/share, we calculate that PH has a current yield of approximately 1.47%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 5.32 against the original $97.46/share purchase price. This works out to a yield on cost of 1.51%.
One more investment quote to leave you with:
“The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.” — Benjamin Graham