“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett
The above quote from Warren Buffett is timeless, and brings into focus the choice about time horizon that any investor should think about before buying a stock they are considering. Behind every stock is an actual business; what will that business look like over a five year period?
Today, let’s look backwards in time to 2017, and take a look at what happened to investors who asked that very question about Procter & Gamble Company (NYSE: PG), by taking a look at the investment outcome over a five year holding period.
| Start date: | 07/24/2017 |
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| End date: | 07/21/2022 | ||||
| Start price/share: | $88.18 | ||||
| End price/share: | $140.77 | ||||
| Starting shares: | 113.40 | ||||
| Ending shares: | 130.07 | ||||
| Dividends reinvested/share: | $15.70 | ||||
| Total return: | 83.10% | ||||
| Average annual return: | 12.87% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $18,306.47 | ||||
The above analysis shows the five year investment result worked out quite well, with an annualized rate of return of 12.87%. This would have turned a $10K investment made 5 years ago into $18,306.47 today (as of 07/21/2022). On a total return basis, that’s a result of 83.10% (something to think about: how might PG shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Procter & Gamble Company paid investors a total of $15.70/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 3.6532/share, we calculate that PG has a current yield of approximately 2.60%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 3.6532 against the original $88.18/share purchase price. This works out to a yield on cost of 2.95%.
More investment wisdom to ponder:
“A stock is not just a ticker symbol or an electronic blip; it is an ownership interest in an actual business, with an underlying value that does not depend on its share price.” — Benjamin Graham
