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“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 Goldman Sachs Group Inc (NYSE: GS) back in 2017. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:

Start date: 01/17/2017
$10,000

01/17/2017
$17,643

01/14/2022
End date: 01/14/2022
Start price/share: $235.74
End price/share: $380.94
Starting shares: 42.42
Ending shares: 46.31
Dividends reinvested/share: $21.70
Total return: 76.43%
Average annual return: 12.04%
Starting investment: $10,000.00
Ending investment: $17,643.92

The above analysis shows the five year investment result worked out quite well, with an annualized rate of return of 12.04%. This would have turned a $10K investment made 5 years ago into $17,643.92 today (as of 01/14/2022). On a total return basis, that’s a result of 76.43% (something to think about: how might GS shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]

Notice that Goldman Sachs Group Inc paid investors a total of $21.70/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 8/share, we calculate that GS has a current yield of approximately 2.10%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 8 against the original $235.74/share purchase price. This works out to a yield on cost of 0.89%.

Here’s one more great investment quote before you go:
“Smart investing doesn’t consist of buying good assets but of buying assets well. This is a very, very important distinction that very, very few people understand.” — Howard Marks