“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett
The wisdom of Warren Buffett reflects a value-based philosophy about investing that says investors are buying shares in a business, and encourages strategic thinking about investment time horizon. Before placing a buy order for a stock, a great question we can ask is whether we would still be comfortable making the investment if we couldn’t sell it for many years?
A “buy-and-hold” approach may call for a time horizon that spans a long period of time — maybe even lasting for a five year holding period. Suppose such a “buy-and-hold” investor had looked into buying shares of TE Connectivity Ltd (NYSE: TEL) back in 2015. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
| Start date: | 06/30/2015 |
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| End date: | 06/29/2020 | ||||
| Start price/share: | $64.30 | ||||
| End price/share: | $80.60 | ||||
| Starting shares: | 155.52 | ||||
| Ending shares: | 172.68 | ||||
| Dividends reinvested/share: | $8.15 | ||||
| Total return: | 39.18% | ||||
| Average annual return: | 6.83% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $13,916.97 | ||||
As shown above, the five year investment result worked out well, with an annualized rate of return of 6.83%. This would have turned a $10K investment made 5 years ago into $13,916.97 today (as of 06/29/2020). On a total return basis, that’s a result of 39.18% (something to think about: how might TEL shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that TE Connectivity Ltd paid investors a total of $8.15/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 1.92/share, we calculate that TEL has a current yield of approximately 2.38%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.92 against the original $64.30/share purchase price. This works out to a yield on cost of 3.70%.
More investment wisdom to ponder:
“You can’t be a good value investor without being an independent thinker; you’re seeing valuations that the market is not appreciating. But it’s critical that you understand why the market isn’t seeing the value you do.” — Joel Greenblatt
