“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett
One of the most important things investors can learn from Warren Buffett, is about how they approach their time horizon for an investment into a stock under consideration. Because immediately after buying shares of a given stock, investors will then be able to check on the day-to-day (and even minute-by-minute) market value. Some days the stock market will be up, other days down. These daily fluctuations can often distract from the long-term view. Today, we look at the result of a five year holding period for an investor who was considering McDonald’s Corp (NYSE: MCD) back in 2016, bought the stock, ignored the market’s ups and downs, and simply held through to today.
|Average annual return:||15.85%|
As shown above, the five year investment result worked out exceptionally well, with an annualized rate of return of 15.85%. This would have turned a $10K investment made 5 years ago into $20,867.97 today (as of 07/21/2021). On a total return basis, that’s a result of 108.69% (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.]
Many investors out there refuse to own any stock that lacks a dividend; in the case of McDonald’s Corp, investors have received $22.20/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 5.16/share, we calculate that MCD has a current yield of approximately 2.19%. 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 $128.26/share purchase price. This works out to a yield on cost of 1.71%.
More investment wisdom to ponder:
“While some might mistakenly consider value investing a mechanical tool for identifying bargains, it is actually a comprehensive investment philosophy that emphasizes the need to perform in-depth fundamental analysis, pursue long-term investment results, limit risk, and resist crowd psychology.” — Seth Klarman