“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 2015, and take a look at what happened to investors who asked that very question about Union Pacific Corp (NYSE: UNP), by taking a look at the investment outcome over a five year holding period.
| Start date: | 02/05/2015 |
|
|||
| End date: | 02/04/2020 | ||||
| Start price/share: | $122.85 | ||||
| End price/share: | $183.24 | ||||
| Starting shares: | 81.40 | ||||
| Ending shares: | 91.14 | ||||
| Dividends reinvested/share: | $13.70 | ||||
| Total return: | 67.00% | ||||
| Average annual return: | 10.80% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $16,699.32 | ||||
As shown above, the five year investment result worked out quite well, with an annualized rate of return of 10.80%. This would have turned a $10K investment made 5 years ago into $16,699.32 today (as of 02/04/2020). On a total return basis, that’s a result of 67.00% (something to think about: how might UNP shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Union Pacific Corp paid investors a total of $13.70/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 3.88/share, we calculate that UNP has a current yield of approximately 2.12%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 3.88 against the original $122.85/share purchase price. This works out to a yield on cost of 1.73%.
Another great investment quote to think about:
“The older I get, the more I see a straight path where I want to go. If you’re going to hunt elephants, don’t get off the trail for a rabbit.” — T. Boone Pickens
