“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 decade-long holding period. Suppose such a “buy-and-hold” investor had looked into buying shares of CVS Health Corporation (NYSE: CVS) 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: | 03/27/2013 |
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| End date: | 03/24/2023 | ||||
| Start price/share: | $54.99 | ||||
| End price/share: | $73.26 | ||||
| Starting shares: | 181.85 | ||||
| Ending shares: | 228.99 | ||||
| Dividends reinvested/share: | $17.68 | ||||
| Total return: | 67.76% | ||||
| Average annual return: | 5.31% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $16,773.92 | ||||
As shown above, the decade-long investment result worked out well, with an annualized rate of return of 5.31%. This would have turned a $10K investment made 10 years ago into $16,773.92 today (as of 03/24/2023). On a total return basis, that’s a result of 67.76% (something to think about: how might CVS shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that CVS Health Corporation paid investors a total of $17.68/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 2.42/share, we calculate that CVS has a current yield of approximately 3.30%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2.42 against the original $54.99/share purchase price. This works out to a yield on cost of 6.00%.
Here’s one more great investment quote before you go:
“If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.” — Peter Lynch
