“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett
This inspiring quote from Warren Buffett teaches us the importance of considering our investment time horizon when approaching any given investment: Could we envision ourselves holding the stock we are considering for many years? Even a five year holding period potentially?
For “buy-and-hold” investors taking a long-term view, what’s important isn’t the short-term stock market fluctuations that will inevitably occur, but what happens over the long haul. Looking back 5 years to 2015, investors considering an investment into shares of Bank of America Corp (NYSE: BAC) may have been pondering this very question and thinking about their potential investment result over a full five year time horizon. Here’s how that would have worked out.
| Start date: | 01/12/2015 |
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| End date: | 01/09/2020 | ||||
| Start price/share: | $16.68 | ||||
| End price/share: | $35.03 | ||||
| Starting shares: | 599.52 | ||||
| Ending shares: | 651.84 | ||||
| Dividends reinvested/share: | $2.04 | ||||
| Total return: | 128.34% | ||||
| Average annual return: | 17.98% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $22,837.50 | ||||
As we can see, the five year investment result worked out exceptionally well, with an annualized rate of return of 17.98%. This would have turned a $10K investment made 5 years ago into $22,837.50 today (as of 01/09/2020). On a total return basis, that’s a result of 128.34% (something to think about: how might BAC shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Bank of America Corp paid investors a total of $2.04/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 .72/share, we calculate that BAC has a current yield of approximately 2.06%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of .72 against the original $16.68/share purchase price. This works out to a yield on cost of 12.35%.
Another great investment quote to think about:
“The whole secret to winning big in the stock market is not to be right all the time, but to lose the least amount possible when you’re wrong.” — William O’Neil
