“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 Parker Hannifin Corp (NYSE: PH) 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: | 09/15/2015 |
|
|||
| End date: | 09/14/2020 | ||||
| Start price/share: | $108.17 | ||||
| End price/share: | $211.44 | ||||
| Starting shares: | 92.45 | ||||
| Ending shares: | 101.65 | ||||
| Dividends reinvested/share: | $14.77 | ||||
| Total return: | 114.94% | ||||
| Average annual return: | 16.53% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $21,496.65 | ||||
As shown above, the five year investment result worked out exceptionally well, with an annualized rate of return of 16.53%. This would have turned a $10K investment made 5 years ago into $21,496.65 today (as of 09/14/2020). On a total return basis, that’s a result of 114.94% (something to think about: how might PH shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Parker Hannifin Corp paid investors a total of $14.77/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 3.52/share, we calculate that PH has a current yield of approximately 1.66%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 3.52 against the original $108.17/share purchase price. This works out to a yield on cost of 1.53%.
More investment wisdom to ponder:
“Don’t wait for the perfect time, you will wait forever. Always take advantage of the time you’re given and make it perfect.” — Daymond John
