“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett
This inspiring quote from Warren Buffett teaches us the importance of considering our investment time horizon when approaching any given investment: Could we envision ourselves holding the stock we are considering for many years? Even a five year holding period potentially?
For “buy-and-hold” investors taking a long-term view, what’s important isn’t the short-term stock market fluctuations that will inevitably occur, but what happens over the long haul. Looking back 5 years to 2017, investors considering an investment into shares of The Charles Schwab Corporation (NYSE: SCHW) may have been pondering this very question and thinking about their potential investment result over a full five year time horizon. Here’s how that would have worked out.
|Average annual return:||14.22%|
As we can see, the five year investment result worked out quite well, with an annualized rate of return of 14.22%. This would have turned a $10K investment made 5 years ago into $19,440.65 today (as of 09/13/2022). On a total return basis, that’s a result of 94.42% (something to think about: how might SCHW shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that The Charles Schwab Corporation paid investors a total of $3.28/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 .88/share, we calculate that SCHW has a current yield of approximately 1.21%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of .88 against the original $39.99/share purchase price. This works out to a yield on cost of 3.03%.
Another great investment quote to think about:
“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