“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett
Investors can learn a lot from Warren Buffett, whose above quote teaches the importance of thinking about investment time horizon, and asking ourselves before buying any given stock: can we envision holding onto it for years — even a five year holding period possibly?
Suppose a “buy-and-hold” investor was considering an investment into Medtronic PLC (NYSE: MDT) back in 2015: back then, such an investor may have been pondering this very same question. Had they answered “yes” to a full five year investment time horizon and then actually held for these past 5 years, here’s how that investment would have turned out.
| Start date: | 03/02/2015 |
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| End date: | 02/28/2020 | ||||
| Start price/share: | $78.83 | ||||
| End price/share: | $100.67 | ||||
| Starting shares: | 126.86 | ||||
| Ending shares: | 140.23 | ||||
| Dividends reinvested/share: | $8.51 | ||||
| Total return: | 41.16% | ||||
| Average annual return: | 7.14% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $14,114.85 | ||||
The above analysis shows the five year investment result worked out well, with an annualized rate of return of 7.14%. This would have turned a $10K investment made 5 years ago into $14,114.85 today (as of 02/28/2020). On a total return basis, that’s a result of 41.16% (something to think about: how might MDT shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Medtronic PLC paid investors a total of $8.51/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 2.16/share, we calculate that MDT has a current yield of approximately 2.15%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2.16 against the original $78.83/share purchase price. This works out to a yield on cost of 2.73%.
More investment wisdom to ponder:
“If you’re looking for a home run, a great investment for five years or 10 years or more, then the only way to beat this enormous fog that covers the future is to identify a long-term trend that will give a particular business some sort of edge.” — Ralph Wanger
