“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 Lowe’s Companies Inc (NYSE: LOW), by taking a look at the investment outcome over a five year holding period.
| Start date: | 12/17/2014 |
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| End date: | 12/16/2019 | ||||
| Start price/share: | $65.95 | ||||
| End price/share: | $120.08 | ||||
| Starting shares: | 151.63 | ||||
| Ending shares: | 165.75 | ||||
| Dividends reinvested/share: | $7.64 | ||||
| Total return: | 99.03% | ||||
| Average annual return: | 14.76% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $19,904.57 | ||||
As shown above, the five year investment result worked out quite well, with an annualized rate of return of 14.76%. This would have turned a $10K investment made 5 years ago into $19,904.57 today (as of 12/16/2019). On a total return basis, that’s a result of 99.03% (something to think about: how might LOW shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Lowe’s Companies Inc paid investors a total of $7.64/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 2.2/share, we calculate that LOW has a current yield of approximately 1.83%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2.2 against the original $65.95/share purchase price. This works out to a yield on cost of 2.77%.
More investment wisdom to ponder:
“Waiting helps you as an investor and a lot of people just can’t stand to wait. If you didn’t get the deferred-gratification gene, you’ve got to work very hard to overcome that.” — Charlie Munger
