“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 McDonald’s Corp (NYSE: MCD) 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: | 06/07/2013 |
|
|||
| End date: | 06/06/2023 | ||||
| Start price/share: | $98.28 | ||||
| End price/share: | $284.54 | ||||
| Starting shares: | 101.75 | ||||
| Ending shares: | 133.20 | ||||
| Dividends reinvested/share: | $43.65 | ||||
| Total return: | 278.99% | ||||
| Average annual return: | 14.25% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $37,907.10 | ||||
The above analysis shows the ten year investment result worked out quite well, with an annualized rate of return of 14.25%. This would have turned a $10K investment made 10 years ago into $37,907.10 today (as of 06/06/2023). On a total return basis, that’s a result of 278.99% (something to think about: how might MCD shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that McDonald’s Corp paid investors a total of $43.65/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 6.08/share, we calculate that MCD has a current yield of approximately 2.14%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 6.08 against the original $98.28/share purchase price. This works out to a yield on cost of 2.18%.
Another great investment quote to think about:
“Cash is a fact, profit is an opinion.” — Alfred Rappaport
