Photo credit: commons.wikimedia.org

“I buy on the assumption that they could close the market the next day and not reopen it for five years.”

— Warren Buffett

The wisdom of Warren Buffett reflects a value-based philosophy about investing that says investors are buying shares in a business, and encourages strategic thinking about investment time horizon. Before placing a buy order for a stock, a great question we can ask is whether we would still be comfortable making the investment if we couldn’t sell it for many years?

A “buy-and-hold” approach may call for a time horizon that spans a long period of time — maybe even lasting for a five year holding period. Suppose such a “buy-and-hold” investor had looked into buying shares of Apple Inc (NASD: AAPL) back in 2014. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:

Start date: 10/01/2014
$10,000

10/01/2014
$24,614

09/30/2019
End date: 09/30/2019
Start price/share: $99.18
End price/share: $223.97
Starting shares: 100.83
Ending shares: 109.89
Dividends reinvested/share: $12.28
Total return: 146.12%
Average annual return: 19.74%
Starting investment: $10,000.00
Ending investment: $24,614.80

As we can see, the five year investment result worked out exceptionally well, with an annualized rate of return of 19.74%. This would have turned a $10K investment made 5 years ago into $24,614.80 today (as of 09/30/2019). On a total return basis, that’s a result of 146.12% (something to think about: how might AAPL shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]

Notice that Apple Inc paid investors a total of $12.28/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 3.08/share, we calculate that AAPL has a current yield of approximately 1.38%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 3.08 against the original $99.18/share purchase price. This works out to a yield on cost of 1.39%.

Here’s one more great investment quote before you go:
“If you’re looking for a home run, a great investment for five years or 10 years or more, then the only way to beat this enormous fog that covers the future is to identify a long-term trend that will give a particular business some sort of edge.” — Ralph Wanger