“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 Lockheed Martin Corp (NYSE: LMT), by taking a look at the investment outcome over a five year holding period.
| Start date: | 12/09/2014 |
|
|||
| End date: | 12/06/2019 | ||||
| Start price/share: | $190.62 | ||||
| End price/share: | $386.86 | ||||
| Starting shares: | 52.46 | ||||
| Ending shares: | 60.00 | ||||
| Dividends reinvested/share: | $37.58 | ||||
| Total return: | 132.11% | ||||
| Average annual return: | 18.36% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $23,207.25 | ||||
As shown above, the five year investment result worked out exceptionally well, with an annualized rate of return of 18.36%. This would have turned a $10K investment made 5 years ago into $23,207.25 today (as of 12/06/2019). On a total return basis, that’s a result of 132.11% (something to think about: how might LMT shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Lockheed Martin Corp paid investors a total of $37.58/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 9.6/share, we calculate that LMT has a current yield of approximately 2.48%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 9.6 against the original $190.62/share purchase price. This works out to a yield on cost of 1.30%.
One more piece of investment wisdom to leave you with:
“You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.” — Peter Lynch
