“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 Costco Wholesale Corp (NASD: COST), by taking a look at the investment outcome over a five year holding period.
| Start date: | 04/05/2019 |
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| End date: | 04/04/2024 | ||||
| Start price/share: | $245.87 | ||||
| End price/share: | $704.88 | ||||
| Starting shares: | 40.67 | ||||
| Ending shares: | 44.34 | ||||
| Dividends reinvested/share: | $41.24 | ||||
| Total return: | 212.55% | ||||
| Average annual return: | 25.58% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $31,251.68 | ||||
As shown above, the five year investment result worked out exceptionally well, with an annualized rate of return of 25.58%. This would have turned a $10K investment made 5 years ago into $31,251.68 today (as of 04/04/2024). On a total return basis, that’s a result of 212.55% (something to think about: how might COST shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Costco Wholesale Corp paid investors a total of $41.24/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 4.08/share, we calculate that COST has a current yield of approximately 0.58%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 4.08 against the original $245.87/share purchase price. This works out to a yield on cost of 0.24%.
One more piece of investment wisdom to leave you with:
“A 10% decline in the market is fairly common, it happens about once a year. Investors who realize this are less likely to sell in a panic, and more likely to remain invested, benefitting from the wealthbuilding power of stocks.” — Christopher Davis
