“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 Johnson & Johnson (NYSE: JNJ) back in 2014. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
| Start date: | 06/02/2014 |
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| End date: | 05/30/2024 | ||||
| Start price/share: | $102.17 | ||||
| End price/share: | $145.28 | ||||
| Starting shares: | 97.88 | ||||
| Ending shares: | 128.68 | ||||
| Dividends reinvested/share: | $37.86 | ||||
| Total return: | 86.94% | ||||
| Average annual return: | 6.46% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $18,700.99 | ||||
The above analysis shows the decade-long investment result worked out well, with an annualized rate of return of 6.46%. This would have turned a $10K investment made 10 years ago into $18,700.99 today (as of 05/30/2024). On a total return basis, that’s a result of 86.94% (something to think about: how might JNJ shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Johnson & Johnson paid investors a total of $37.86/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 4.96/share, we calculate that JNJ has a current yield of approximately 3.41%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 4.96 against the original $102.17/share purchase price. This works out to a yield on cost of 3.34%.
More investment wisdom to ponder:
“Everyone has the brainpower to make money in stocks. Not everyone has the stomach. If you are susceptible to selling everything in a panic, you ought to avoid stocks and mutual funds altogether.” — Peter Lynch
