“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett
The above quote from Warren Buffett is timeless, and brings into focus the choice about time horizon that any investor should think about before buying a stock they are considering. Behind every stock is an actual business; what will that business look like over a five year period?
Today, let’s look backwards in time to 2014, and take a look at what happened to investors who asked that very question about Digital Realty Trust Inc (NYSE: DLR), by taking a look at the investment outcome over a five year holding period.
| Start date: | 08/20/2014 |
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| End date: | 08/19/2019 | ||||
| Start price/share: | $66.94 | ||||
| End price/share: | $124.33 | ||||
| Starting shares: | 149.39 | ||||
| Ending shares: | 182.64 | ||||
| Dividends reinvested/share: | $18.50 | ||||
| Total return: | 127.08% | ||||
| Average annual return: | 17.82% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $22,703.62 | ||||
As we can see, the five year investment result worked out exceptionally well, with an annualized rate of return of 17.82%. This would have turned a $10K investment made 5 years ago into $22,703.62 today (as of 08/19/2019). On a total return basis, that’s a result of 127.08% (something to think about: how might DLR shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Digital Realty Trust Inc paid investors a total of $18.50/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 4.32/share, we calculate that DLR has a current yield of approximately 3.47%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 4.32 against the original $66.94/share purchase price. This works out to a yield on cost of 5.18%.
One more piece of investment wisdom to leave you with:
“There is nothing riskier than the widespread perception that there is no risk.” — Howard Marks
