“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 Home Depot Inc (NYSE: HD) 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.
|Average annual return:||18.72%|
As shown above, the five year investment result worked out exceptionally well, with an annualized rate of return of 18.72%. This would have turned a $10K investment made 5 years ago into $23,561.94 today (as of 08/12/2022). On a total return basis, that’s a result of 135.59% (something to think about: how might HD shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Home Depot Inc paid investors a total of $27.74/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 7.6/share, we calculate that HD has a current yield of approximately 2.41%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 7.6 against the original $150.17/share purchase price. This works out to a yield on cost of 1.60%.
Here’s one more great investment quote before you go:
“Value investing is at its core the marriage of a contrarian streak and a calculator.” — Seth Klarman