“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 FedEx Corp (NYSE: FDX) back in 2016: 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.
|Average annual return:||16.09%|
As shown above, the five year investment result worked out exceptionally well, with an annualized rate of return of 16.09%. This would have turned a $10K investment made 5 years ago into $21,067.79 today (as of 01/15/2021). On a total return basis, that’s a result of 110.68% (something to think about: how might FDX shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that FedEx Corp paid investors a total of $11.00/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 2.6/share, we calculate that FDX has a current yield of approximately 1.03%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2.6 against the original $127.20/share purchase price. This works out to a yield on cost of 0.81%.
More investment wisdom to ponder:
“If you have trouble imagining a 20% loss in the stock market, you shouldn’t be in stocks.” — John Bogle