“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 Ross Stores Inc (NASD: ROST) 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.
| Start date: | 02/08/2016 |
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| End date: | 02/05/2021 | ||||
| Start price/share: | $53.33 | ||||
| End price/share: | $118.72 | ||||
| Starting shares: | 187.51 | ||||
| Ending shares: | 195.80 | ||||
| Dividends reinvested/share: | $3.38 | ||||
| Total return: | 132.46% | ||||
| Average annual return: | 18.39% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $23,247.39 | ||||
As we can see, the five year investment result worked out exceptionally well, with an annualized rate of return of 18.39%. This would have turned a $10K investment made 5 years ago into $23,247.39 today (as of 02/05/2021). On a total return basis, that’s a result of 132.46% (something to think about: how might ROST shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Ross Stores Inc paid investors a total of $3.38/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 1.14/share, we calculate that ROST has a current yield of approximately 0.00%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.14 against the original $53.33/share purchase price. This works out to a yield on cost of 0.00%.
Here’s one more great investment quote before you go:
“History provides a crucial insight regarding market crises: they are inevitable, painful and ultimately surmountable.” — Shelby Davis
