“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 Cisco Systems Inc (NASD: CSCO) back in 2011. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
| Start date: | 04/28/2011 |
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| End date: | 04/27/2021 | ||||
| Start price/share: | $17.29 | ||||
| End price/share: | $51.37 | ||||
| Starting shares: | 578.37 | ||||
| Ending shares: | 775.73 | ||||
| Dividends reinvested/share: | $9.63 | ||||
| Total return: | 298.49% | ||||
| Average annual return: | 14.82% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $39,856.97 | ||||
As we can see, the ten year investment result worked out quite well, with an annualized rate of return of 14.82%. This would have turned a $10K investment made 10 years ago into $39,856.97 today (as of 04/27/2021). On a total return basis, that’s a result of 298.49% (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 $9.63/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 1.48/share, we calculate that CSCO has a current yield of approximately 2.88%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.48 against the original $17.29/share purchase price. This works out to a yield on cost of 16.66%.
One more investment quote to leave you with:
“I make no attempt to forecast the market; my efforts are devoted to finding undervalued securities.” — Warren Buffett
