“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 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 ten year period?
Today, let’s look backwards in time to 2010, and take a look at what happened to investors who asked that very question about Union Pacific Corp (NYSE: UNP), by taking a look at the investment outcome over a ten year holding period.
| Start date: | 11/08/2010 |
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| End date: | 11/05/2020 | ||||
| Start price/share: | $45.99 | ||||
| End price/share: | $192.07 | ||||
| Starting shares: | 217.44 | ||||
| Ending shares: | 269.08 | ||||
| Dividends reinvested/share: | $22.39 | ||||
| Total return: | 416.82% | ||||
| Average annual return: | 17.85% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $51,676.83 | ||||
As we can see, the ten year investment result worked out exceptionally well, with an annualized rate of return of 17.85%. This would have turned a $10K investment made 10 years ago into $51,676.83 today (as of 11/05/2020). On a total return basis, that’s a result of 416.82% (something to think about: how might UNP shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Union Pacific Corp paid investors a total of $22.39/share in dividends over the 10 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 3.88/share, we calculate that UNP has a current yield of approximately 2.02%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 3.88 against the original $45.99/share purchase price. This works out to a yield on cost of 4.39%.
More investment wisdom to ponder:
“Searching for companies is like looking for grubs under rocks: if you turn over 10 rocks you’ll likely find one grub; if you turn over 20 rocks you’ll find two.” — Peter Lynch
