“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 Union Pacific Corp (NYSE: UNP) back in 2015. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
|Average annual return:||13.35%|
As shown above, the five year investment result worked out quite well, with an annualized rate of return of 13.35%. This would have turned a $10K investment made 5 years ago into $18,717.88 today (as of 06/01/2020). On a total return basis, that’s a result of 87.14% (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 $14.54/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 2.29%. 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 $101.60/share purchase price. This works out to a yield on cost of 2.25%.
Another great investment quote to think about:
“One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute.” — William Feather