“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 Alliant Energy Corp (NASD: LNT) back in 2019. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
| Start date: | 09/12/2019 |
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| End date: | 09/11/2024 | ||||
| Start price/share: | $51.70 | ||||
| End price/share: | $59.00 | ||||
| Starting shares: | 193.42 | ||||
| Ending shares: | 225.98 | ||||
| Dividends reinvested/share: | $8.45 | ||||
| Total return: | 33.33% | ||||
| Average annual return: | 5.92% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $13,333.93 | ||||
The above analysis shows the five year investment result worked out well, with an annualized rate of return of 5.92%. This would have turned a $10K investment made 5 years ago into $13,333.93 today (as of 09/11/2024). On a total return basis, that’s a result of 33.33% (something to think about: how might LNT shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Alliant Energy Corp paid investors a total of $8.45/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 1.92/share, we calculate that LNT has a current yield of approximately 3.25%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.92 against the original $51.70/share purchase price. This works out to a yield on cost of 6.29%.
One more piece of investment wisdom to leave you with:
“History provides a crucial insight regarding market crises: they are inevitable, painful and ultimately surmountable.” — Shelby Davis
