“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 Xcel Energy Inc (NASD: XEL) back in 2015. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
| Start date: | 12/07/2015 |
|
|||
| End date: | 12/04/2020 | ||||
| Start price/share: | $35.27 | ||||
| End price/share: | $65.75 | ||||
| Starting shares: | 283.53 | ||||
| Ending shares: | 330.19 | ||||
| Dividends reinvested/share: | $7.55 | ||||
| Total return: | 117.10% | ||||
| Average annual return: | 16.78% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $21,709.90 | ||||
As shown above, the five year investment result worked out exceptionally well, with an annualized rate of return of 16.78%. This would have turned a $10K investment made 5 years ago into $21,709.90 today (as of 12/04/2020). On a total return basis, that’s a result of 117.10% (something to think about: how might XEL shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Many investors out there refuse to own any stock that lacks a dividend; in the case of Xcel Energy Inc, investors have received $7.55/share in dividends these past 5 years examined in the exercise above. This means total return was driven not just by share price, but also by the dividends received (and what the investor did with those dividends). For this exercise, what we’ve done with the dividends is to assume they are reinvestted — i.e. used to purchase additional shares (the calculations use closing price on ex-date).
Based upon the most recent annualized dividend rate of 1.72/share, we calculate that XEL has a current yield of approximately 2.62%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.72 against the original $35.27/share purchase price. This works out to a yield on cost of 7.43%.
Here’s one more great investment quote before you go:
“There’s a virtuous cycle when people have to defend challenges to their ideas. Any gaps in thinking or analysis become clear pretty quickly when smart people ask good, logical questions.” — Joel Greenblatt
