“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett
The above quote from Warren Buffett is timeless, and brings into focus the choice about time horizon that any investor should think about before buying a stock they are considering. Behind every stock is an actual business; what will that business look like over a five year period?
Today, let’s look backwards in time to 2019, and take a look at what happened to investors who asked that very question about International Business Machines Corp (NYSE: IBM), by taking a look at the investment outcome over a five year holding period.
| Start date: | 01/23/2019 |
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| End date: | 01/22/2024 | ||||
| Start price/share: | $127.05 | ||||
| End price/share: | $172.83 | ||||
| Starting shares: | 78.71 | ||||
| Ending shares: | 100.55 | ||||
| Dividends reinvested/share: | $31.93 | ||||
| Total return: | 73.77% | ||||
| Average annual return: | 11.69% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $17,380.87 | ||||
As we can see, the five year investment result worked out quite well, with an annualized rate of return of 11.69%. This would have turned a $10K investment made 5 years ago into $17,380.87 today (as of 01/22/2024). On a total return basis, that’s a result of 73.77% (something to think about: how might IBM shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that International Business Machines Corp paid investors a total of $31.93/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 6.64/share, we calculate that IBM has a current yield of approximately 3.84%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 6.64 against the original $127.05/share purchase price. This works out to a yield on cost of 3.02%.
More investment wisdom to ponder:
“We ignore outlooks and forecasts… we’re lousy at it and we admit it … everyone else is lousy too, but most people won’t admit it.” — Martin Whitman
