“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett
One of the most important things investors can learn from Warren Buffett, is about how they approach their time horizon for an investment into a stock under consideration. Because immediately after buying shares of a given stock, investors will then be able to check on the day-to-day (and even minute-by-minute) market value. Some days the stock market will be up, other days down. These daily fluctuations can often distract from the long-term view. Today, we look at the result of a five year holding period for an investor who was considering Illinois Tool Works, Inc. (NYSE: ITW) back in 2019, bought the stock, ignored the market’s ups and downs, and simply held through to today.
| Start date: | 08/01/2019 |
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| End date: | 07/31/2024 | ||||
| Start price/share: | $151.41 | ||||
| End price/share: | $247.28 | ||||
| Starting shares: | 66.05 | ||||
| Ending shares: | 74.27 | ||||
| Dividends reinvested/share: | $24.56 | ||||
| Total return: | 83.66% | ||||
| Average annual return: | 12.92% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $18,365.34 | ||||
The above analysis shows the five year investment result worked out quite well, with an annualized rate of return of 12.92%. This would have turned a $10K investment made 5 years ago into $18,365.34 today (as of 07/31/2024). On a total return basis, that’s a result of 83.66% (something to think about: how might ITW shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Illinois Tool Works, Inc. paid investors a total of $24.56/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 5.6/share, we calculate that ITW has a current yield of approximately 2.26%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 5.6 against the original $151.41/share purchase price. This works out to a yield on cost of 1.49%.
One more piece of investment wisdom to leave you with:
“Wide diversification is only required when investors do not understand what they are doing.” — Warren Buffett
