“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 |
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| 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
