“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett
A key lesson we can learn from Warren Buffett, is about how to think about a potential stock investment in the context of a long-term time horizon. Every investor in a stock has a choice: bite our fingernails over the short-term ups and downs that are inevitable with the stock market, or, zero in on stocks we are comfortable to simply buy and hold for the long haul — maybe even a five year holding period. Heck, investors can even choose to completely ignore the stock market’s short-run quotations and instead go into their initial investment planning to hold on for years and years regardless of the fluctuations in price that might occur next.
Today, we examine what would have happened over a five year holding period, had you decided back in 2015 to buy shares of Cisco Systems Inc (NASD: CSCO) and simply hold through to today.
| Start date: | 07/02/2015 |
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| End date: | 07/01/2020 | ||||
| Start price/share: | $27.33 | ||||
| End price/share: | $46.06 | ||||
| Starting shares: | 365.90 | ||||
| Ending shares: | 425.88 | ||||
| Dividends reinvested/share: | $5.70 | ||||
| Total return: | 96.16% | ||||
| Average annual return: | 14.42% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $19,618.69 | ||||
As shown above, the five year investment result worked out quite well, with an annualized rate of return of 14.42%. This would have turned a $10K investment made 5 years ago into $19,618.69 today (as of 07/01/2020). On a total return basis, that’s a result of 96.16% (something to think about: how might CSCO shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Dividends are always an important investment factor to consider, and Cisco Systems Inc has paid $5.70/share in dividends to shareholders over the past 5 years we looked at above. Many an investor will only invest in stocks that pay dividends, so this component of total return is always an important consideration. Automated reinvestment of dividends into additional shares of stock can be a great way for an investor to compound their returns. The above calculations are done with the assuption that dividends received over time are reinvested (the calcuations use the closing price on ex-date).
Based upon the most recent annualized dividend rate of 1.44/share, we calculate that CSCO has a current yield of approximately 3.13%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.44 against the original $27.33/share purchase price. This works out to a yield on cost of 11.45%.
Another great investment quote to think about:
“To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.” — Benjamin Graham
