Photo credit: commons.wikimedia.org

“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 Starbucks Corp. (NASD: SBUX) back in 2015. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:

Start date: 01/22/2015
$10,000

01/22/2015
$24,420

01/21/2020
End date: 01/21/2020
Start price/share: $41.37
End price/share: $92.53
Starting shares: 241.72
Ending shares: 263.89
Dividends reinvested/share: $5.39
Total return: 144.18%
Average annual return: 19.55%
Starting investment: $10,000.00
Ending investment: $24,420.13

The above analysis shows the five year investment result worked out exceptionally well, with an annualized rate of return of 19.55%. This would have turned a $10K investment made 5 years ago into $24,420.13 today (as of 01/21/2020). On a total return basis, that’s a result of 144.18% (something to think about: how might SBUX shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]

Notice that Starbucks Corp. paid investors a total of $5.39/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 1.64/share, we calculate that SBUX has a current yield of approximately 1.77%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.64 against the original $41.37/share purchase price. This works out to a yield on cost of 4.28%.

Here’s one more great investment quote before you go:
“The person who starts simply with the idea of getting rich won’t succeed; you must have a larger ambition.” — John Rockefeller