“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 Loews Corp. (NYSE: L) 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.
| Start date: | 07/06/2016 |
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| End date: | 07/02/2021 | ||||
| Start price/share: | $40.13 | ||||
| End price/share: | $54.99 | ||||
| Starting shares: | 249.19 | ||||
| Ending shares: | 256.03 | ||||
| Dividends reinvested/share: | $1.26 | ||||
| Total return: | 40.79% | ||||
| Average annual return: | 7.09% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $14,076.67 | ||||
As we can see, the five year investment result worked out well, with an annualized rate of return of 7.09%. This would have turned a $10K investment made 5 years ago into $14,076.67 today (as of 07/02/2021). On a total return basis, that’s a result of 40.79% (something to think about: how might L shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Loews Corp. paid investors a total of $1.26/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 .25/share, we calculate that L has a current yield of approximately 0.45%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of .25 against the original $40.13/share purchase price. This works out to a yield on cost of 1.12%.
More investment wisdom to ponder:
“If you have more than 120 or 130 I.Q. points, you can afford to give the rest away. You don’t need extraordinary intelligence to succeed as an investor.” — Warren Buffett
