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“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 Humana Inc. (NYSE: HUM) back in 2016. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:

Start date: 02/02/2016
$10,000

02/02/2016
$23,565

02/01/2021
End date: 02/01/2021
Start price/share: $166.87
End price/share: $379.90
Starting shares: 59.93
Ending shares: 62.03
Dividends reinvested/share: $9.46
Total return: 135.64%
Average annual return: 18.69%
Starting investment: $10,000.00
Ending investment: $23,565.38

As shown above, the five year investment result worked out exceptionally well, with an annualized rate of return of 18.69%. This would have turned a $10K investment made 5 years ago into $23,565.38 today (as of 02/01/2021). On a total return basis, that’s a result of 135.64% (something to think about: how might HUM shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]

Notice that Humana Inc. paid investors a total of $9.46/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 2.5/share, we calculate that HUM has a current yield of approximately 0.66%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2.5 against the original $166.87/share purchase price. This works out to a yield on cost of 0.40%.

One more piece of investment wisdom to leave you with:
“As in roulette, same is true of the stock trader, who will find that the expense of trading weights the dice heavily against him.” — Benjamin Graham