“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett
The above quote from Warren Buffett is timeless, and brings into focus the choice about time horizon that any investor should think about before buying a stock they are considering. Behind every stock is an actual business; what will that business look like over a five year period?
Today, let’s look backwards in time to 2015, and take a look at what happened to investors who asked that very question about Fastenal Co. (NASD: FAST), by taking a look at the investment outcome over a five year holding period.
| Start date: | 04/21/2015 |
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| End date: | 04/20/2020 | ||||
| Start price/share: | $20.63 | ||||
| End price/share: | $34.92 | ||||
| Starting shares: | 484.73 | ||||
| Ending shares: | 557.36 | ||||
| Dividends reinvested/share: | $3.55 | ||||
| Total return: | 94.63% | ||||
| Average annual return: | 14.24% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $19,464.77 | ||||
The above analysis shows the five year investment result worked out quite well, with an annualized rate of return of 14.24%. This would have turned a $10K investment made 5 years ago into $19,464.77 today (as of 04/20/2020). On a total return basis, that’s a result of 94.63% (something to think about: how might FAST shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Fastenal Co. paid investors a total of $3.55/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/share, we calculate that FAST has a current yield of approximately 2.86%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1 against the original $20.63/share purchase price. This works out to a yield on cost of 13.86%.
Another great investment quote to think about:
“Confronted with a challenge to distill the secret of sound investment into three words, we venture the motto, Margin of Safety.” — Benjamin Graham
