“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
— Warren Buffett
The above quote from Warren Buffett is timeless, and brings into focus the choice about time horizon that any investor should think about before buying a stock they are considering. Behind every stock is an actual business; what will that business look like over a decade-long period?
Today, let’s look backwards in time to 2014, and take a look at what happened to investors who asked that very question about Cisco Systems Inc (NASD: CSCO), by taking a look at the investment outcome over a decade-long holding period.
| Start date: | 10/02/2014 |
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| End date: | 10/01/2024 | ||||
| Start price/share: | $25.06 | ||||
| End price/share: | $52.74 | ||||
| Starting shares: | 399.04 | ||||
| Ending shares: | 541.62 | ||||
| Dividends reinvested/share: | $12.75 | ||||
| Total return: | 185.65% | ||||
| Average annual return: | 11.06% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $28,564.48 | ||||
As we can see, the decade-long investment result worked out quite well, with an annualized rate of return of 11.06%. This would have turned a $10K investment made 10 years ago into $28,564.48 today (as of 10/01/2024). On a total return basis, that’s a result of 185.65% (something to think about: how might CSCO shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Cisco Systems Inc paid investors a total of $12.75/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 1.6/share, we calculate that CSCO has a current yield of approximately 3.03%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.6 against the original $25.06/share purchase price. This works out to a yield on cost of 12.09%.
Another great investment quote to think about:
“Investing is the intersection of economics and psychology.” — Seth Klarman
