“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 2018, investors considering an investment into shares of Home Depot Inc (NYSE: HD) 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: | 08/22/2018 |
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| End date: | 08/21/2023 | ||||
| Start price/share: | $198.97 | ||||
| End price/share: | $324.06 | ||||
| Starting shares: | 50.26 | ||||
| Ending shares: | 56.74 | ||||
| Dividends reinvested/share: | $31.88 | ||||
| Total return: | 83.86% | ||||
| Average annual return: | 12.95% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $18,383.63 | ||||
The above analysis shows the five year investment result worked out quite well, with an annualized rate of return of 12.95%. This would have turned a $10K investment made 5 years ago into $18,383.63 today (as of 08/21/2023). On a total return basis, that’s a result of 83.86% (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 $31.88/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 8.36/share, we calculate that HD has a current yield of approximately 2.58%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 8.36 against the original $198.97/share purchase price. This works out to a yield on cost of 1.30%.
One more investment quote to leave you with:
“When the public is most frightened, only the strong are left, and that’s when the market is in the best possible hands.” — Victor Niederhoffer
