“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 Thermo Fisher Scientific Inc (NYSE: TMO) 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: | 02/05/2015 |
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| End date: | 02/04/2020 | ||||
| Start price/share: | $127.04 | ||||
| End price/share: | $325.96 | ||||
| Starting shares: | 78.72 | ||||
| Ending shares: | 80.13 | ||||
| Dividends reinvested/share: | $3.24 | ||||
| Total return: | 161.19% | ||||
| Average annual return: | 21.17% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $26,120.14 | ||||
As shown above, the five year investment result worked out exceptionally well, with an annualized rate of return of 21.17%. This would have turned a $10K investment made 5 years ago into $26,120.14 today (as of 02/04/2020). On a total return basis, that’s a result of 161.19% (something to think about: how might TMO shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Thermo Fisher Scientific Inc paid investors a total of $3.24/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 .76/share, we calculate that TMO has a current yield of approximately 0.23%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of .76 against the original $127.04/share purchase price. This works out to a yield on cost of 0.18%.
One more investment quote to leave you with:
“Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.” — Warren Buffett
