“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 Eli Lilly (NYSE: LLY) back in 2017: 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: | 03/30/2017 |
|
|||
| End date: | 03/29/2022 | ||||
| Start price/share: | $84.76 | ||||
| End price/share: | $288.39 | ||||
| Starting shares: | 117.98 | ||||
| Ending shares: | 131.12 | ||||
| Dividends reinvested/share: | $13.73 | ||||
| Total return: | 278.12% | ||||
| Average annual return: | 30.47% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $37,805.35 | ||||
As we can see, the five year investment result worked out exceptionally well, with an annualized rate of return of 30.47%. This would have turned a $10K investment made 5 years ago into $37,805.35 today (as of 03/29/2022). On a total return basis, that’s a result of 278.12% (something to think about: how might LLY shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Eli Lilly paid investors a total of $13.73/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 3.92/share, we calculate that LLY has a current yield of approximately 1.36%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 3.92 against the original $84.76/share purchase price. This works out to a yield on cost of 1.60%.
One more piece of investment wisdom to leave you with:
“When I was young I thought that money was the most important thing in life; now that I am old I know that it is.” — Oscar Wilde
