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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 United Parcel Service Inc (NYSE: UPS) 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: 11/19/2014
$10,000

11/19/2014
$13,566

11/18/2019
End date: 11/18/2019
Start price/share: $105.64
End price/share: $122.77
Starting shares: 94.66
Ending shares: 110.52
Dividends reinvested/share: $16.84
Total return: 35.69%
Average annual return: 6.29%
Starting investment: $10,000.00
Ending investment: $13,566.32

As we can see, the five year investment result worked out well, with an annualized rate of return of 6.29%. This would have turned a $10K investment made 5 years ago into $13,566.32 today (as of 11/18/2019). On a total return basis, that’s a result of 35.69% (something to think about: how might UPS shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]

Notice that United Parcel Service Inc paid investors a total of $16.84/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 3.84/share, we calculate that UPS has a current yield of approximately 3.13%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 3.84 against the original $105.64/share purchase price. This works out to a yield on cost of 2.96%.

Another great investment quote to think about:
“Don’t look for the needle in the haystack, just buy the haystack.” — John Bogle