“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett
Investors can learn a lot from Warren Buffett, whose above quote teaches the importance of thinking about investment time horizon, and asking ourselves before buying any given stock: can we envision holding onto it for years — even a five year holding period possibly?
Suppose a “buy-and-hold” investor was considering an investment into Xylem Inc (NYSE: XYL) back in 2014: back then, such an investor may have been pondering this very same question. Had they answered “yes” to a full five year investment time horizon and then actually held for these past 5 years, here’s how that investment would have turned out.
| Start date: | 04/07/2014 |
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| End date: | 04/04/2019 | ||||
| Start price/share: | $36.38 | ||||
| End price/share: | $80.00 | ||||
| Starting shares: | 274.88 | ||||
| Ending shares: | 294.27 | ||||
| Dividends reinvested/share: | $3.37 | ||||
| Total return: | 135.41% | ||||
| Average annual return: | 18.70% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $23,542.12 | ||||
As we can see, the five year investment result worked out exceptionally well, with an annualized rate of return of 18.70%. This would have turned a $10K investment made 5 years ago into $23,542.12 today (as of 04/04/2019). On a total return basis, that’s a result of 135.41% (something to think about: how might XYL shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Xylem Inc paid investors a total of $3.37/share in dividends over the 5 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 .96/share, we calculate that XYL has a current yield of approximately 1.20%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of .96 against the original $36.38/share purchase price. This works out to a yield on cost of 3.30%.
Here’s one more great investment quote before you go:
“I believe in the discipline of mastering the best that other people have ever figured out. I don’t believe in just sitting down and trying to dream it all up yourself. Nobody’s that smart.” — Charlie Munger
