“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 Quest Diagnostics, Inc. (NYSE: DGX), by taking a look at the investment outcome over a five year holding period.
| Start date: | 12/24/2014 |
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| End date: | 12/23/2019 | ||||
| Start price/share: | $67.94 | ||||
| End price/share: | $107.26 | ||||
| Starting shares: | 147.19 | ||||
| Ending shares: | 162.93 | ||||
| Dividends reinvested/share: | $8.92 | ||||
| Total return: | 74.75% | ||||
| Average annual return: | 11.81% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $17,474.44 | ||||
The above analysis shows the five year investment result worked out quite well, with an annualized rate of return of 11.81%. This would have turned a $10K investment made 5 years ago into $17,474.44 today (as of 12/23/2019). On a total return basis, that’s a result of 74.75% (something to think about: how might DGX shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Quest Diagnostics, Inc. paid investors a total of $8.92/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 2.12/share, we calculate that DGX has a current yield of approximately 1.98%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2.12 against the original $67.94/share purchase price. This works out to a yield on cost of 2.91%.
Here’s one more great investment quote before you go:
“Searching for companies is like looking for grubs under rocks: if you turn over 10 rocks you’ll likely find one grub; if you turn over 20 rocks you’ll find two.” — Peter Lynch
