“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 SunTrust Banks Inc (NYSE: STI) 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: | 04/29/2014 |
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| End date: | 04/26/2019 | ||||
| Start price/share: | $37.94 | ||||
| End price/share: | $64.96 | ||||
| Starting shares: | 263.57 | ||||
| Ending shares: | 296.54 | ||||
| Dividends reinvested/share: | $6.14 | ||||
| Total return: | 92.63% | ||||
| Average annual return: | 14.03% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $19,265.63 | ||||
As we can see, the five year investment result worked out quite well, with an annualized rate of return of 14.03%. This would have turned a $10K investment made 5 years ago into $19,265.63 today (as of 04/26/2019). On a total return basis, that’s a result of 92.63% (something to think about: how might STI shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that SunTrust Banks Inc paid investors a total of $6.14/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 2/share, we calculate that STI has a current yield of approximately 3.08%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2 against the original $37.94/share purchase price. This works out to a yield on cost of 8.12%.
Here’s one more great investment quote before you go:
“If a speculator is correct half of the time, he is hitting a good average. Even being right 3 or 4 times out of 10 should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he is wrong.” — Bernard Baruch
