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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 NetApp, Inc. (NASD: NTAP) 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: 10/01/2014
$10,000

10/01/2014
$14,143

09/30/2019
End date: 09/30/2019
Start price/share: $41.33
End price/share: $52.51
Starting shares: 241.95
Ending shares: 269.40
Dividends reinvested/share: $4.86
Total return: 41.46%
Average annual return: 7.18%
Starting investment: $10,000.00
Ending investment: $14,143.89

As we can see, the five year investment result worked out well, with an annualized rate of return of 7.18%. This would have turned a $10K investment made 5 years ago into $14,143.89 today (as of 09/30/2019). On a total return basis, that’s a result of 41.46% (something to think about: how might NTAP shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]

Notice that NetApp, Inc. paid investors a total of $4.86/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 1.92/share, we calculate that NTAP has a current yield of approximately 3.66%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.92 against the original $41.33/share purchase price. This works out to a yield on cost of 8.86%.

Another great investment quote to think about:
“Only when the tide goes out do you discover who’s been swimming naked.” — Warren Buffett