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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 Extra Space Storage Inc (NYSE: EXR) 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: 06/06/2014
$10,000

06/06/2014
$24,430

06/05/2019
End date: 06/05/2019
Start price/share: $53.63
End price/share: $109.73
Starting shares: 186.46
Ending shares: 222.68
Dividends reinvested/share: $13.92
Total return: 144.34%
Average annual return: 19.56%
Starting investment: $10,000.00
Ending investment: $24,430.34

As shown above, the five year investment result worked out exceptionally well, with an annualized rate of return of 19.56%. This would have turned a $10K investment made 5 years ago into $24,430.34 today (as of 06/05/2019). On a total return basis, that’s a result of 144.34% (something to think about: how might EXR shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]

Notice that Extra Space Storage Inc paid investors a total of $13.92/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 3.6/share, we calculate that EXR has a current yield of approximately 3.28%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 3.6 against the original $53.63/share purchase price. This works out to a yield on cost of 6.12%.

Another great investment quote to think about:
“The best stock to buy is the one you already own.” — Peter Lynch