“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 Alliant Energy Corp (NASD: LNT) 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: | 05/13/2014 |
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| End date: | 05/10/2019 | ||||
| Start price/share: | $28.68 | ||||
| End price/share: | $47.18 | ||||
| Starting shares: | 348.68 | ||||
| Ending shares: | 410.94 | ||||
| Dividends reinvested/share: | $6.10 | ||||
| Total return: | 93.88% | ||||
| Average annual return: | 14.18% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $19,392.54 | ||||
As we can see, the five year investment result worked out quite well, with an annualized rate of return of 14.18%. This would have turned a $10K investment made 5 years ago into $19,392.54 today (as of 05/10/2019). On a total return basis, that’s a result of 93.88% (something to think about: how might LNT shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Alliant Energy Corp paid investors a total of $6.10/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 1.42/share, we calculate that LNT has a current yield of approximately 3.01%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.42 against the original $28.68/share purchase price. This works out to a yield on cost of 10.50%.
One more piece of investment wisdom to leave you with:
“If you can follow only one bit of data, follow the earnings.” — Peter Lynch
