“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 2016, and take a look at what happened to investors who asked that very question about Capital One Financial Corp (NYSE: COF), by taking a look at the investment outcome over a five year holding period.
| Start date: | 01/29/2016 |
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| End date: | 01/28/2021 | ||||
| Start price/share: | $65.62 | ||||
| End price/share: | $106.84 | ||||
| Starting shares: | 152.39 | ||||
| Ending shares: | 166.88 | ||||
| Dividends reinvested/share: | $7.40 | ||||
| Total return: | 78.29% | ||||
| Average annual return: | 12.25% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $17,826.63 | ||||
The above analysis shows the five year investment result worked out quite well, with an annualized rate of return of 12.25%. This would have turned a $10K investment made 5 years ago into $17,826.63 today (as of 01/28/2021). On a total return basis, that’s a result of 78.29% (something to think about: how might COF shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Capital One Financial Corp paid investors a total of $7.40/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 .4/share, we calculate that COF has a current yield of approximately 0.37%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of .4 against the original $65.62/share purchase price. This works out to a yield on cost of 0.56%.
One more piece of investment wisdom to leave you with:
“While some might mistakenly consider value investing a mechanical tool for identifying bargains, it is actually a comprehensive investment philosophy that emphasizes the need to perform in-depth fundamental analysis, pursue long-term investment results, limit risk, and resist crowd psychology.” — Seth Klarman
