“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett
This inspiring quote from Warren Buffett teaches us the importance of considering our investment time horizon when approaching any given investment: Could we envision ourselves holding the stock we are considering for many years? Even a five year holding period potentially?
For “buy-and-hold” investors taking a long-term view, what’s important isn’t the short-term stock market fluctuations that will inevitably occur, but what happens over the long haul. Looking back 5 years to 2018, investors considering an investment into shares of Eaton Corp plc (NYSE: ETN) may have been pondering this very question and thinking about their potential investment result over a full five year time horizon. Here’s how that would have worked out.
| Start date: | 04/02/2018 |
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| End date: | 03/29/2023 | ||||
| Start price/share: | $77.69 | ||||
| End price/share: | $167.63 | ||||
| Starting shares: | 128.72 | ||||
| Ending shares: | 144.11 | ||||
| Dividends reinvested/share: | $12.83 | ||||
| Total return: | 141.57% | ||||
| Average annual return: | 19.33% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $24,161.14 | ||||
The above analysis shows the five year investment result worked out exceptionally well, with an annualized rate of return of 19.33%. This would have turned a $10K investment made 5 years ago into $24,161.14 today (as of 03/29/2023). On a total return basis, that’s a result of 141.57% (something to think about: how might ETN shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Eaton Corp plc paid investors a total of $12.83/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 3.44/share, we calculate that ETN has a current yield of approximately 2.05%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 3.44 against the original $77.69/share purchase price. This works out to a yield on cost of 2.64%.
Here’s one more great investment quote before you go:
“If you’re prepared to invest in a company, then you ought to be able to explain why in simple language that a fifth grader could understand, and quickly enough so the fifth grader won’t get bored.” — Peter Lynch
