“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”
— 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 twenty year holding period. Suppose such a “buy-and-hold” investor had looked into buying shares of International Business Machines Corp (NYSE: IBM) back in 2005. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
| Start date: | 03/14/2005 |
|
|||
| End date: | 03/13/2025 | ||||
| Start price/share: | $87.86 | ||||
| End price/share: | $245.80 | ||||
| Starting shares: | 113.82 | ||||
| Ending shares: | 208.82 | ||||
| Dividends reinvested/share: | $84.73 | ||||
| Total return: | 413.27% | ||||
| Average annual return: | 8.52% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $51,343.75 | ||||
The above analysis shows the twenty year investment result worked out well, with an annualized rate of return of 8.52%. This would have turned a $10K investment made 20 years ago into $51,343.75 today (as of 03/13/2025). On a total return basis, that’s a result of 413.27% (something to think about: how might IBM shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that International Business Machines Corp paid investors a total of $84.73/share in dividends over the 20 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 6.68/share, we calculate that IBM has a current yield of approximately 2.72%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 6.68 against the original $87.86/share purchase price. This works out to a yield on cost of 3.10%.
Here’s one more great investment quote before you go:
“I made my money by selling too soon.” — Bernard Baruch
