“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett
Investors can learn a lot from Warren Buffett, whose above quote teaches the importance of thinking about investment time horizon, and asking ourselves before buying any given stock: can we envision holding onto it for years — even a five year holding period possibly?
Suppose a “buy-and-hold” investor was considering an investment into Union Pacific Corp (NYSE: UNP) back in 2014: back then, such an investor may have been pondering this very same question. Had they answered “yes” to a full five year investment time horizon and then actually held for these past 5 years, here’s how that investment would have turned out.
| Start date: | 05/12/2014 |
|
|||
| End date: | 05/09/2019 | ||||
| Start price/share: | $95.82 | ||||
| End price/share: | $175.63 | ||||
| Starting shares: | 104.36 | ||||
| Ending shares: | 116.49 | ||||
| Dividends reinvested/share: | $12.33 | ||||
| Total return: | 104.58% | ||||
| Average annual return: | 15.41% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $20,458.61 | ||||
As shown above, the five year investment result worked out exceptionally well, with an annualized rate of return of 15.41%. This would have turned a $10K investment made 5 years ago into $20,458.61 today (as of 05/09/2019). On a total return basis, that’s a result of 104.58% (something to think about: how might UNP shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Union Pacific Corp paid investors a total of $12.33/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 3.52/share, we calculate that UNP has a current yield of approximately 2.00%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 3.52 against the original $95.82/share purchase price. This works out to a yield on cost of 2.09%.
Here’s one more great investment quote before you go:
“Money is better than poverty, if only for financial reasons.” — Woody Allen
