“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 CMS Energy Corp (NYSE: CMS) back in 2018: 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.
| Start date: | 05/22/2018 |
|
|||
| End date: | 05/19/2023 | ||||
| Start price/share: | $44.12 | ||||
| End price/share: | $58.63 | ||||
| Starting shares: | 226.65 | ||||
| Ending shares: | 261.00 | ||||
| Dividends reinvested/share: | $8.44 | ||||
| Total return: | 53.03% | ||||
| Average annual return: | 8.89% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $15,301.62 | ||||
As we can see, the five year investment result worked out well, with an annualized rate of return of 8.89%. This would have turned a $10K investment made 5 years ago into $15,301.62 today (as of 05/19/2023). On a total return basis, that’s a result of 53.03% (something to think about: how might CMS shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that CMS Energy Corp paid investors a total of $8.44/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 1.95/share, we calculate that CMS has a current yield of approximately 3.33%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.95 against the original $44.12/share purchase price. This works out to a yield on cost of 7.55%.
Another great investment quote to think about:
“Price is what you pay. Value is what you get.” — Warren Buffett
