“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 AES Corp (NYSE: AES) 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: | 07/10/2013 |
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| End date: | 07/07/2023 | ||||
| Start price/share: | $12.26 | ||||
| End price/share: | $21.09 | ||||
| Starting shares: | 815.66 | ||||
| Ending shares: | 1,108.67 | ||||
| Dividends reinvested/share: | $4.81 | ||||
| Total return: | 133.82% | ||||
| Average annual return: | 8.87% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $23,387.36 | ||||
As shown above, the ten year investment result worked out well, with an annualized rate of return of 8.87%. This would have turned a $10K investment made 10 years ago into $23,387.36 today (as of 07/07/2023). On a total return basis, that’s a result of 133.82% (something to think about: how might AES shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that AES Corp paid investors a total of $4.81/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 .6636/share, we calculate that AES has a current yield of approximately 3.15%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of .6636 against the original $12.26/share purchase price. This works out to a yield on cost of 25.69%.
One more piece of investment wisdom to leave you with:
“The emotional burden of trading is substantial; on any given day, I could lose millions of dollars. If you personalize these losses, you can’t trade.” — Bruce Kovner
