“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 McDonald’s Corp (NYSE: MCD), by taking a look at the investment outcome over a five year holding period.
| Start date: | 10/21/2015 |
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| End date: | 10/20/2020 | ||||
| Start price/share: | $102.54 | ||||
| End price/share: | $227.45 | ||||
| Starting shares: | 97.52 | ||||
| Ending shares: | 111.19 | ||||
| Dividends reinvested/share: | $21.00 | ||||
| Total return: | 152.91% | ||||
| Average annual return: | 20.38% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $25,292.54 | ||||
As we can see, the five year investment result worked out exceptionally well, with an annualized rate of return of 20.38%. This would have turned a $10K investment made 5 years ago into $25,292.54 today (as of 10/20/2020). On a total return basis, that’s a result of 152.91% (something to think about: how might MCD shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that McDonald’s Corp paid investors a total of $21.00/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 5.16/share, we calculate that MCD has a current yield of approximately 2.27%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 5.16 against the original $102.54/share purchase price. This works out to a yield on cost of 2.21%.
Here’s one more great investment quote before you go:
“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
