“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett
The wisdom of Warren Buffett reflects a value-based philosophy about investing that says investors are buying shares in a business, and encourages strategic thinking about investment time horizon. Before placing a buy order for a stock, a great question we can ask is whether we would still be comfortable making the investment if we couldn’t sell it for many years?
A “buy-and-hold” approach may call for a time horizon that spans a long period of time — maybe even lasting for a five year holding period. Suppose such a “buy-and-hold” investor had looked into buying shares of Illinois Tool Works, Inc. (NYSE: ITW) back in 2018. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
|Average annual return:||9.06%|
As shown above, the five year investment result worked out well, with an annualized rate of return of 9.06%. This would have turned a $10K investment made 5 years ago into $15,428.63 today (as of 01/31/2023). On a total return basis, that’s a result of 54.32% (something to think about: how might ITW shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Always an important consideration with a dividend-paying company is: should we reinvest our dividends?Over the past 5 years, Illinois Tool Works, Inc. has paid $21.90/share in dividends. For the above analysis, we assume that the investor reinvests dividends into new shares of stock (for the above calculations, the reinvestment is performed using closing price on ex-div date for that dividend).
Based upon the most recent annualized dividend rate of 5.24/share, we calculate that ITW has a current yield of approximately 2.22%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 5.24 against the original $173.08/share purchase price. This works out to a yield on cost of 1.28%.
Another great investment quote to think about:
“A market downturn doesn’t bother us. It is an opportunity to increase our ownership of great companies with great management at good prices.” — Warren Buffett