“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett
This inspiring quote from Warren Buffett teaches us the importance of considering our investment time horizon when approaching any given investment: Could we envision ourselves holding the stock we are considering for many years? Even a five year holding period potentially?
For “buy-and-hold” investors taking a long-term view, what’s important isn’t the short-term stock market fluctuations that will inevitably occur, but what happens over the long haul. Looking back 5 years to 2014, investors considering an investment into shares of PepsiCo Inc (NASD: PEP) may have been pondering this very question and thinking about their potential investment result over a full five year time horizon. Here’s how that would have worked out.
| Start date: | 07/29/2014 |
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| End date: | 07/26/2019 | ||||
| Start price/share: | $90.14 | ||||
| End price/share: | $131.22 | ||||
| Starting shares: | 110.94 | ||||
| Ending shares: | 128.49 | ||||
| Dividends reinvested/share: | $15.68 | ||||
| Total return: | 68.61% | ||||
| Average annual return: | 11.03% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $16,863.69 | ||||
As we can see, the five year investment result worked out quite well, with an annualized rate of return of 11.03%. This would have turned a $10K investment made 5 years ago into $16,863.69 today (as of 07/26/2019). On a total return basis, that’s a result of 68.61% (something to think about: how might PEP shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that PepsiCo Inc paid investors a total of $15.68/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 3.82/share, we calculate that PEP 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 3.82 against the original $90.14/share purchase price. This works out to a yield on cost of 3.23%.
More investment wisdom to ponder:
“Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.” — Warren Buffett
