“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 Dominion Energy Inc (NYSE: D) 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: | 12/02/2014 |
|
|||
| End date: | 11/29/2019 | ||||
| Start price/share: | $72.84 | ||||
| End price/share: | $83.11 | ||||
| Starting shares: | 137.29 | ||||
| Ending shares: | 167.06 | ||||
| Dividends reinvested/share: | $14.52 | ||||
| Total return: | 38.84% | ||||
| Average annual return: | 6.79% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $13,883.42 | ||||
As we can see, the five year investment result worked out well, with an annualized rate of return of 6.79%. This would have turned a $10K investment made 5 years ago into $13,883.42 today (as of 11/29/2019). On a total return basis, that’s a result of 38.84% (something to think about: how might D shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Dominion Energy Inc paid investors a total of $14.52/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 3.67/share, we calculate that D has a current yield of approximately 4.42%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 3.67 against the original $72.84/share purchase price. This works out to a yield on cost of 6.07%.
More investment wisdom to ponder:
“Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.” — Warren Buffett
