“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 Eli Lilly (NYSE: LLY) 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.
| Start date: | 10/16/2017 |
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| End date: | 10/13/2022 | ||||
| Start price/share: | $85.95 | ||||
| End price/share: | $332.10 | ||||
| Starting shares: | 116.35 | ||||
| Ending shares: | 128.49 | ||||
| Dividends reinvested/share: | $14.65 | ||||
| Total return: | 326.70% | ||||
| Average annual return: | 33.71% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $42,670.54 | ||||
As shown above, the five year investment result worked out exceptionally well, with an annualized rate of return of 33.71%. This would have turned a $10K investment made 5 years ago into $42,670.54 today (as of 10/13/2022). On a total return basis, that’s a result of 326.70% (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 $14.65/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 1.18%. 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 $85.95/share purchase price. This works out to a yield on cost of 1.37%.
One more piece of investment wisdom to leave you with:
“You can get in much more trouble with a good idea than a bad idea, because you forget that the good idea has limits.” — Benjamin Graham
