Photo credit: commons.wikimedia.org

“I buy on the assumption that they could close the market the next day and not reopen it for five years.”

— Warren Buffett

One of the most important things investors can learn from Warren Buffett, is about how they approach their time horizon for an investment into a stock under consideration. Because immediately after buying shares of a given stock, investors will then be able to check on the day-to-day (and even minute-by-minute) market value. Some days the stock market will be up, other days down. These daily fluctuations can often distract from the long-term view. Today, we look at the result of a five year holding period for an investor who was considering Johnson & Johnson (NYSE: JNJ) back in 2015, bought the stock, ignored the market’s ups and downs, and simply held through to today.

Start date: 03/02/2015
$10,000

03/02/2015
$15,449

02/27/2020
End date: 02/27/2020
Start price/share: $103.22
End price/share: $139.12
Starting shares: 96.88
Ending shares: 111.06
Dividends reinvested/share: $16.96
Total return: 54.51%
Average annual return: 9.10%
Starting investment: $10,000.00
Ending investment: $15,449.57

The above analysis shows the five year investment result worked out well, with an annualized rate of return of 9.10%. This would have turned a $10K investment made 5 years ago into $15,449.57 today (as of 02/27/2020). On a total return basis, that’s a result of 54.51% (something to think about: how might JNJ shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]

Notice that Johnson & Johnson paid investors a total of $16.96/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 3.8/share, we calculate that JNJ has a current yield of approximately 2.73%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 3.8 against the original $103.22/share purchase price. This works out to a yield on cost of 2.64%.

More investment wisdom to ponder:
“The function of economic forecasting is to make astrology look respectable.” — John Galbraith