“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett
Investors can learn a lot from Warren Buffett, whose above quote teaches the importance of thinking about investment time horizon, and asking ourselves before buying any given stock: can we envision holding onto it for years — even a five year holding period possibly?
Suppose a “buy-and-hold” investor was considering an investment into Starbucks Corp. (NASD: SBUX) back in 2016: back then, such an investor may have been pondering this very same question. Had they answered “yes” to a full five year investment time horizon and then actually held for these past 5 years, here’s how that investment would have turned out.
|Average annual return:||17.99%|
The above analysis shows the five year investment result worked out exceptionally well, with an annualized rate of return of 17.99%. This would have turned a $10K investment made 5 years ago into $22,867.89 today (as of 07/13/2021). On a total return basis, that’s a result of 128.67% (something to think about: how might SBUX shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Starbucks Corp. paid investors a total of $6.89/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 1.8/share, we calculate that SBUX has a current yield of approximately 1.51%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.8 against the original $57.59/share purchase price. This works out to a yield on cost of 2.62%.
One more piece of investment wisdom to leave you with:
“Waiting helps you as an investor and a lot of people just can’t stand to wait. If you didn’t get the deferred-gratification gene, you’ve got to work very hard to overcome that.” — Charlie Munger