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“I buy on the assumption that they could close the market the next day and not reopen it for five years.”

— 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 five year holding period. Suppose such a “buy-and-hold” investor had looked into buying shares of Best Buy Inc (NYSE: BBY) back in 2014. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:

Start date: 05/19/2014
$10,000

05/19/2014
$30,847

05/16/2019
End date: 05/16/2019
Start price/share: $26.12
End price/share: $68.74
Starting shares: 382.85
Ending shares: 448.76
Dividends reinvested/share: $7.21
Total return: 208.47%
Average annual return: 25.30%
Starting investment: $10,000.00
Ending investment: $30,847.41

The above analysis shows the five year investment result worked out exceptionally well, with an annualized rate of return of 25.30%. This would have turned a $10K investment made 5 years ago into $30,847.41 today (as of 05/16/2019). On a total return basis, that’s a result of 208.47% (something to think about: how might BBY shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]

Notice that Best Buy Inc paid investors a total of $7.21/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 BBY has a current yield of approximately 2.91%. 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 $26.12/share purchase price. This works out to a yield on cost of 11.14%.

One more piece of investment wisdom to leave you with:
“In the end, how your investments behave is much less important than how you behave.” — Benjamin Graham