“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett
Investors can learn a lot from Warren Buffett, whose above quote teaches the importance of thinking about investment time horizon, and asking ourselves before buying any given stock: can we envision holding onto it for years — even a five year holding period possibly?
Suppose a “buy-and-hold” investor was considering an investment into Cisco Systems Inc (NASD: CSCO) back in 2015: back then, such an investor may have been pondering this very same question. Had they answered “yes” to a full five year investment time horizon and then actually held for these past 5 years, here’s how that investment would have turned out.
| Start date: | 11/03/2015 |
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| End date: | 11/02/2020 | ||||
| Start price/share: | $28.61 | ||||
| End price/share: | $35.90 | ||||
| Starting shares: | 349.53 | ||||
| Ending shares: | 410.49 | ||||
| Dividends reinvested/share: | $6.21 | ||||
| Total return: | 47.36% | ||||
| Average annual return: | 8.06% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $14,737.27 | ||||
As shown above, the five year investment result worked out well, with an annualized rate of return of 8.06%. This would have turned a $10K investment made 5 years ago into $14,737.27 today (as of 11/02/2020). On a total return basis, that’s a result of 47.36% (something to think about: how might CSCO shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Cisco Systems Inc paid investors a total of $6.21/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 1.44/share, we calculate that CSCO has a current yield of approximately 4.01%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.44 against the original $28.61/share purchase price. This works out to a yield on cost of 14.02%.
More investment wisdom to ponder:
“One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute.” — William Feather
