“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett
The above quote from Warren Buffett is timeless, and brings into focus the choice about time horizon that any investor should think about before buying a stock they are considering. Behind every stock is an actual business; what will that business look like over a five year period?
Today, let’s look backwards in time to 2016, and take a look at what happened to investors who asked that very question about US Bancorp (NYSE: USB), by taking a look at the investment outcome over a five year holding period.
| Start date: | 02/11/2016 |
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| End date: | 02/10/2021 | ||||
| Start price/share: | $37.45 | ||||
| End price/share: | $47.35 | ||||
| Starting shares: | 267.02 | ||||
| Ending shares: | 309.35 | ||||
| Dividends reinvested/share: | $6.83 | ||||
| Total return: | 46.48% | ||||
| Average annual return: | 7.93% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $14,648.79 | ||||
As we can see, the five year investment result worked out well, with an annualized rate of return of 7.93%. This would have turned a $10K investment made 5 years ago into $14,648.79 today (as of 02/10/2021). On a total return basis, that’s a result of 46.48% (something to think about: how might USB shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that US Bancorp paid investors a total of $6.83/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 1.68/share, we calculate that USB has a current yield of approximately 3.55%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.68 against the original $37.45/share purchase price. This works out to a yield on cost of 9.48%.
More investment wisdom to ponder:
“You’ve got to be careful if you don’t know where you’re going, ’cause you might not get there.” — Yogi Berra
