Photo credit:

“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 PepsiCo Inc (NASD: PEP) 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: 12/31/2018


End date: 12/28/2023
Start price/share: $110.48
End price/share: $169.39
Starting shares: 90.51
Ending shares: 104.25
Dividends reinvested/share: $21.53
Total return: 76.58%
Average annual return: 12.06%
Starting investment: $10,000.00
Ending investment: $17,659.65

The above analysis shows the five year investment result worked out quite well, with an annualized rate of return of 12.06%. This would have turned a $10K investment made 5 years ago into $17,659.65 today (as of 12/28/2023). On a total return basis, that’s a result of 76.58% (something to think about: how might PEP shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]

Notice that PepsiCo Inc paid investors a total of $21.53/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 5.06/share, we calculate that PEP has a current yield of approximately 2.99%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 5.06 against the original $110.48/share purchase price. This works out to a yield on cost of 2.71%.

One more piece of investment wisdom to leave you with:
“If you’re looking for a home run, a great investment for five years or 10 years or more, then the only way to beat this enormous fog that covers the future is to identify a long-term trend that will give a particular business some sort of edge.” — Ralph Wanger