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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

Investors can learn a lot from Warren Buffett, whose above quote teaches the importance of thinking about investment time horizon, and asking ourselves before buying any given stock: can we envision holding onto it for years — even a five year holding period possibly?

Suppose a “buy-and-hold” investor was considering an investment into Merck & Co Inc (NYSE: MRK) back in 2014: back then, such an investor may have been pondering this very same question. Had they answered “yes” to a full five year investment time horizon and then actually held for these past 5 years, here’s how that investment would have turned out.

Start date: 09/08/2014
$10,000

09/08/2014
$16,450

09/05/2019
End date: 09/05/2019
Start price/share: $61.05
End price/share: $86.10
Starting shares: 163.80
Ending shares: 191.02
Dividends reinvested/share: $9.53
Total return: 64.47%
Average annual return: 10.48%
Starting investment: $10,000.00
Ending investment: $16,450.58

The above analysis shows the five year investment result worked out quite well, with an annualized rate of return of 10.48%. This would have turned a $10K investment made 5 years ago into $16,450.58 today (as of 09/05/2019). On a total return basis, that’s a result of 64.47% (something to think about: how might MRK shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]

Notice that Merck & Co Inc paid investors a total of $9.53/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 2.2/share, we calculate that MRK has a current yield of approximately 2.56%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2.2 against the original $61.05/share purchase price. This works out to a yield on cost of 4.19%.

One more piece of investment wisdom to leave you with:
“Be fearful when others are greedy; be greedy when others are fearful.” — Warren Buffett