“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett
This inspiring quote from Warren Buffett teaches us the importance of considering our investment time horizon when approaching any given investment: Could we envision ourselves holding the stock we are considering for many years? Even a five year holding period potentially?
For “buy-and-hold” investors taking a long-term view, what’s important isn’t the short-term stock market fluctuations that will inevitably occur, but what happens over the long haul. Looking back 5 years to 2016, investors considering an investment into shares of Home Depot Inc (NYSE: HD) may have been pondering this very question and thinking about their potential investment result over a full five year time horizon. Here’s how that would have worked out.
| Start date: | 04/07/2016 |
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| End date: | 04/06/2021 | ||||
| Start price/share: | $133.87 | ||||
| End price/share: | $313.78 | ||||
| Starting shares: | 74.70 | ||||
| Ending shares: | 83.99 | ||||
| Dividends reinvested/share: | $22.84 | ||||
| Total return: | 163.53% | ||||
| Average annual return: | 21.39% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $26,358.13 | ||||
The above analysis shows the five year investment result worked out exceptionally well, with an annualized rate of return of 21.39%. This would have turned a $10K investment made 5 years ago into $26,358.13 today (as of 04/06/2021). On a total return basis, that’s a result of 163.53% (something to think about: how might HD shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Home Depot Inc paid investors a total of $22.84/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 6.6/share, we calculate that HD has a current yield of approximately 2.10%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 6.6 against the original $133.87/share purchase price. This works out to a yield on cost of 1.57%.
Here’s one more great investment quote before you go:
“Only when the tide goes out do you discover who’s been swimming naked.” — Warren Buffett
