“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 Procter & Gamble Company (NYSE: PG) 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: | 10/27/2014 |
|
|||
| End date: | 10/24/2024 | ||||
| Start price/share: | $85.95 | ||||
| End price/share: | $169.62 | ||||
| Starting shares: | 116.35 | ||||
| Ending shares: | 154.27 | ||||
| Dividends reinvested/share: | $31.67 | ||||
| Total return: | 161.67% | ||||
| Average annual return: | 10.10% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $26,174.19 | ||||
As shown above, the ten year investment result worked out quite well, with an annualized rate of return of 10.10%. This would have turned a $10K investment made 10 years ago into $26,174.19 today (as of 10/24/2024). On a total return basis, that’s a result of 161.67% (something to think about: how might PG shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Procter & Gamble Company paid investors a total of $31.67/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 4.026/share, we calculate that PG has a current yield of approximately 2.37%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 4.026 against the original $85.95/share purchase price. This works out to a yield on cost of 2.76%.
Here’s one more great investment quote before you go:
“Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” — Albert Einstein
