“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 McDonald’s Corp (NYSE: MCD), by taking a look at the investment outcome over a five year holding period.
| Start date: | 04/08/2016 |
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| End date: | 04/07/2021 | ||||
| Start price/share: | $127.96 | ||||
| End price/share: | $232.61 | ||||
| Starting shares: | 78.15 | ||||
| Ending shares: | 88.82 | ||||
| Dividends reinvested/share: | $21.80 | ||||
| Total return: | 106.61% | ||||
| Average annual return: | 15.62% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $20,661.64 | ||||
As we can see, the five year investment result worked out exceptionally well, with an annualized rate of return of 15.62%. This would have turned a $10K investment made 5 years ago into $20,661.64 today (as of 04/07/2021). On a total return basis, that’s a result of 106.61% (something to think about: how might MCD shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Always an important consideration with a dividend-paying company is: should we reinvest our dividends?Over the past 5 years, McDonald’s Corp has paid $21.80/share in dividends. For the above analysis, we assume that the investor reinvests dividends into new shares of stock (for the above calculations, the reinvestment is performed using closing price on ex-div date for that dividend).
Based upon the most recent annualized dividend rate of 5.16/share, we calculate that MCD has a current yield of approximately 2.25%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 5.16 against the original $127.96/share purchase price. This works out to a yield on cost of 1.76%.
Another great investment quote to think about:
“A lot of people with high IQs are terrible investors because they’ve got terrible temperaments. You need to keep raw, irrational emotion under control.” — Charlie Munger
