“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 Union Pacific Corp (NYSE: UNP) back in 2018. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
| Start date: | 11/07/2018 |
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| End date: | 11/06/2023 | ||||
| Start price/share: | $152.87 | ||||
| End price/share: | $213.10 | ||||
| Starting shares: | 65.42 | ||||
| Ending shares: | 72.93 | ||||
| Dividends reinvested/share: | $21.65 | ||||
| Total return: | 55.41% | ||||
| Average annual return: | 9.22% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $15,542.14 | ||||
As we can see, the five year investment result worked out well, with an annualized rate of return of 9.22%. This would have turned a $10K investment made 5 years ago into $15,542.14 today (as of 11/06/2023). On a total return basis, that’s a result of 55.41% (something to think about: how might UNP shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Union Pacific Corp paid investors a total of $21.65/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 5.2/share, we calculate that UNP has a current yield of approximately 2.44%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 5.2 against the original $152.87/share purchase price. This works out to a yield on cost of 1.60%.
More investment wisdom to ponder:
“Investors should always keep in mind that the most important metric is not the returns achieved but the returns weighed against the risks incurred. Ultimately, nothing should be more important to investors than the ability to sleep soundly at night.” — Seth Klarman
