“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett
The above quote from Warren Buffett is timeless, and brings into focus the choice about time horizon that any investor should think about before buying a stock they are considering. Behind every stock is an actual business; what will that business look like over a five year period?
Today, let’s look backwards in time to 2015, and take a look at what happened to investors who asked that very question about Bank of America Corp (NYSE: BAC), by taking a look at the investment outcome over a five year holding period.
| Start date: | 09/15/2015 |
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| End date: | 09/14/2020 | ||||
| Start price/share: | $16.31 | ||||
| End price/share: | $25.75 | ||||
| Starting shares: | 613.12 | ||||
| Ending shares: | 674.10 | ||||
| Dividends reinvested/share: | $2.43 | ||||
| Total return: | 73.58% | ||||
| Average annual return: | 11.65% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $17,355.01 | ||||
As we can see, the five year investment result worked out quite well, with an annualized rate of return of 11.65%. This would have turned a $10K investment made 5 years ago into $17,355.01 today (as of 09/14/2020). On a total return basis, that’s a result of 73.58% (something to think about: how might BAC shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Always an important consideration with a dividend-paying company is: should we reinvest our dividends?Over the past 5 years, Bank of America Corp has paid $2.43/share in dividends. For the above analysis, we assume that the investor reinvests dividends into new shares of stock (for the above calculations, the reinvestment is performed using closing price on ex-div date for that dividend).
Based upon the most recent annualized dividend rate of .72/share, we calculate that BAC has a current yield of approximately 2.80%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of .72 against the original $16.31/share purchase price. This works out to a yield on cost of 17.17%.
One more piece of investment wisdom to leave you with:
“This company looks cheap, that company looks cheap, but the overall economy could completely screw it up. The key is to wait. Sometimes the hardest thing to do is to do nothing.” — David Tepper
