“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 Valero Energy Corp (NYSE: VLO), by taking a look at the investment outcome over a five year holding period.
| Start date: | 06/07/2016 |
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| End date: | 06/04/2021 | ||||
| Start price/share: | $55.64 | ||||
| End price/share: | $83.24 | ||||
| Starting shares: | 179.73 | ||||
| Ending shares: | 225.48 | ||||
| Dividends reinvested/share: | $16.68 | ||||
| Total return: | 87.69% | ||||
| Average annual return: | 13.44% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $18,772.88 | ||||
As shown above, the five year investment result worked out quite well, with an annualized rate of return of 13.44%. This would have turned a $10K investment made 5 years ago into $18,772.88 today (as of 06/04/2021). On a total return basis, that’s a result of 87.69% (something to think about: how might VLO shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Valero Energy Corp paid investors a total of $16.68/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 3.92/share, we calculate that VLO has a current yield of approximately 4.71%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 3.92 against the original $55.64/share purchase price. This works out to a yield on cost of 8.47%.
One more piece of investment wisdom to leave you with:
“Value investing means really asking what are the best values, and not assuming that because something looks expensive that it is, or assuming that because a stock is down in price and trades at low multiples that it is a bargain.” — Bill Miller
