“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett
The wisdom of Warren Buffett reflects a value-based philosophy about investing that says investors are buying shares in a business, and encourages strategic thinking about investment time horizon. Before placing a buy order for a stock, a great question we can ask is whether we would still be comfortable making the investment if we couldn’t sell it for many years?
A “buy-and-hold” approach may call for a time horizon that spans a long period of time — maybe even lasting for a five year holding period. Suppose such a “buy-and-hold” investor had looked into buying shares of Oracle Corp (NYSE: ORCL) back in 2016. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
Start date: | 12/07/2016 |
|
|||
End date: | 12/06/2021 | ||||
Start price/share: | $40.32 | ||||
End price/share: | $88.94 | ||||
Starting shares: | 248.02 | ||||
Ending shares: | 268.93 | ||||
Dividends reinvested/share: | $4.55 | ||||
Total return: | 139.18% | ||||
Average annual return: | 19.05% | ||||
Starting investment: | $10,000.00 | ||||
Ending investment: | $23,913.71 |
As we can see, the five year investment result worked out exceptionally well, with an annualized rate of return of 19.05%. This would have turned a $10K investment made 5 years ago into $23,913.71 today (as of 12/06/2021). On a total return basis, that’s a result of 139.18% (something to think about: how might ORCL shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Oracle Corp paid investors a total of $4.55/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 1.28/share, we calculate that ORCL has a current yield of approximately 1.44%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.28 against the original $40.32/share purchase price. This works out to a yield on cost of 3.57%.
One more investment quote to leave you with:
“Ensure management’s interests are aligned with shareholders.” — Sam Zell