“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 PACCAR Inc. (NASD: PCAR), by taking a look at the investment outcome over a five year holding period.
| Start date: | 09/12/2014 |
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| End date: | 09/11/2019 | ||||
| Start price/share: | $60.14 | ||||
| End price/share: | $72.32 | ||||
| Starting shares: | 166.28 | ||||
| Ending shares: | 200.44 | ||||
| Dividends reinvested/share: | $11.34 | ||||
| Total return: | 44.96% | ||||
| Average annual return: | 7.71% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $14,497.07 | ||||
As shown above, the five year investment result worked out well, with an annualized rate of return of 7.71%. This would have turned a $10K investment made 5 years ago into $14,497.07 today (as of 09/11/2019). On a total return basis, that’s a result of 44.96% (something to think about: how might PCAR shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that PACCAR Inc. paid investors a total of $11.34/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 1.28/share, we calculate that PCAR has a current yield of approximately 1.77%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.28 against the original $60.14/share purchase price. This works out to a yield on cost of 2.94%.
Here’s one more great investment quote before you go:
“I believe in the discipline of mastering the best that other people have ever figured out. I don’t believe in just sitting down and trying to dream it all up yourself. Nobody’s that smart.” — Charlie Munger
