“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett
The Warren Buffett investment philosophy calls for a long-term investment horizon, where a five year holding period, or even longer, would fit right into the strategy. How would such a strategy have worked out for an investment into International Business Machines Corp (NYSE: IBM)? Today, we examine the outcome of a five year investment into the stock back in 2014.
|Average annual return:||-2.71%|
As shown above, the five year investment result worked out poorly, with an annualized rate of return of -2.71%. This would have turned a $10K investment made 5 years ago into $8,716.48 today (as of 04/09/2019). On a total return basis, that’s a result of -12.86% (something to think about: how might IBM shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that International Business Machines Corp paid investors a total of $27.48/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 6.28/share, we calculate that IBM has a current yield of approximately 4.42%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 6.28 against the original $195.68/share purchase price. This works out to a yield on cost of 2.26%.
One more investment quote to leave you with:
“Twenty years in this business convinces me that any normal person using the customary three percent of the brain can pick stocks just as well, if not better, than the average Wall Street expert.” — Peter Lynch