“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 Packaging Corp of America (NYSE: PKG) 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: | $91.11 | ||||
| End price/share: | $156.39 | ||||
| Starting shares: | 109.76 | ||||
| Ending shares: | 126.59 | ||||
| Dividends reinvested/share: | $16.42 | ||||
| Total return: | 97.97% | ||||
| Average annual return: | 14.64% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $19,800.72 | ||||
As shown above, the five year investment result worked out quite well, with an annualized rate of return of 14.64%. This would have turned a $10K investment made 5 years ago into $19,800.72 today (as of 03/29/2022). On a total return basis, that’s a result of 97.97% (something to think about: how might PKG shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Packaging Corp of America paid investors a total of $16.42/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 4/share, we calculate that PKG has a current yield of approximately 2.56%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 4 against the original $91.11/share purchase price. This works out to a yield on cost of 2.81%.
One more investment quote to leave you with:
“Value investing requires a great deal of hard work, unusually strict discipline, and a long-term investment horizon. Few are willing and able to devote sufficient time and effort to become value investors, and only a fraction of those have the proper mind-set to succeed.” — Seth Klarman
