“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 Visa Inc (NYSE: V) 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:||18.96%|
The above analysis shows the five year investment result worked out exceptionally well, with an annualized rate of return of 18.96%. This would have turned a $10K investment made 5 years ago into $23,834.79 today (as of 10/28/2020). On a total return basis, that’s a result of 138.33% (something to think about: how might V shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Visa Inc paid investors a total of $4.25/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 1.2/share, we calculate that V has a current yield of approximately 0.66%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.2 against the original $78.51/share purchase price. This works out to a yield on cost of 0.84%.
One more investment quote to leave you with:
“If you’re prepared to invest in a company, then you ought to be able to explain why in simple language that a fifth grader could understand, and quickly enough so the fifth grader won’t get bored.” — Peter Lynch