“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 Mastercard Inc (NYSE: MA) 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: | 04/25/2016 |
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| End date: | 04/22/2021 | ||||
| Start price/share: | $96.98 | ||||
| End price/share: | $383.36 | ||||
| Starting shares: | 103.11 | ||||
| Ending shares: | 106.27 | ||||
| Dividends reinvested/share: | $6.06 | ||||
| Total return: | 307.38% | ||||
| Average annual return: | 32.47% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $40,730.39 | ||||
As we can see, the five year investment result worked out exceptionally well, with an annualized rate of return of 32.47%. This would have turned a $10K investment made 5 years ago into $40,730.39 today (as of 04/22/2021). On a total return basis, that’s a result of 307.38% (something to think about: how might MA shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Many investors out there refuse to own any stock that lacks a dividend; in the case of Mastercard Inc, investors have received $6.06/share in dividends these past 5 years examined in the exercise above. This means total return was driven not just by share price, but also by the dividends received (and what the investor did with those dividends). For this exercise, what we’ve done with the dividends is to assume they are reinvestted — i.e. used to purchase additional shares (the calculations use closing price on ex-date).
Based upon the most recent annualized dividend rate of 1.76/share, we calculate that MA has a current yield of approximately 0.46%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.76 against the original $96.98/share purchase price. This works out to a yield on cost of 0.47%.
More investment wisdom to ponder:
“Value investing requires a great deal of hard work, unusually strict discipline, and a long-term investment horizon. Few are willing and able to devote sufficient time and effort to become value investors, and only a fraction of those have the proper mind-set to succeed.” — Seth Klarman
