“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 General Dynamics Corp (NYSE: GD) 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: | 12/05/2019 |
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| End date: | 12/04/2024 | ||||
| Start price/share: | $182.37 | ||||
| End price/share: | $277.66 | ||||
| Starting shares: | 54.83 | ||||
| Ending shares: | 61.81 | ||||
| Dividends reinvested/share: | $24.76 | ||||
| Total return: | 71.61% | ||||
| Average annual return: | 11.40% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $17,161.47 | ||||
As we can see, the five year investment result worked out quite well, with an annualized rate of return of 11.40%. This would have turned a $10K investment made 5 years ago into $17,161.47 today (as of 12/04/2024). On a total return basis, that’s a result of 71.61% (something to think about: how might GD shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that General Dynamics Corp paid investors a total of $24.76/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 5.68/share, we calculate that GD has a current yield of approximately 2.05%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 5.68 against the original $182.37/share purchase price. This works out to a yield on cost of 1.12%.
Here’s one more great investment quote before you go:
“Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” — Albert Einstein
