“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 Honeywell International Inc (NYSE: HON), by taking a look at the investment outcome over a five year holding period.
| Start date: | 03/02/2015 |
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| End date: | 02/27/2020 | ||||
| Start price/share: | $99.71 | ||||
| End price/share: | $159.55 | ||||
| Starting shares: | 100.29 | ||||
| Ending shares: | 111.28 | ||||
| Dividends reinvested/share: | $13.74 | ||||
| Total return: | 77.55% | ||||
| Average annual return: | 12.18% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $17,754.30 | ||||
As shown above, the five year investment result worked out quite well, with an annualized rate of return of 12.18%. This would have turned a $10K investment made 5 years ago into $17,754.30 today (as of 02/27/2020). On a total return basis, that’s a result of 77.55% (something to think about: how might HON shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Honeywell International Inc paid investors a total of $13.74/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 3.6/share, we calculate that HON has a current yield of approximately 2.26%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 3.6 against the original $99.71/share purchase price. This works out to a yield on cost of 2.27%.
Another great investment quote to think about:
“A stock is not just a ticker symbol or an electronic blip; it is an ownership interest in an actual business, with an underlying value that does not depend on its share price.” — Benjamin Graham
