“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 2019, and take a look at what happened to investors who asked that very question about Phillips 66 (NYSE: PSX), by taking a look at the investment outcome over a five year holding period.
| Start date: | 04/24/2019 |
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| End date: | 04/23/2024 | ||||
| Start price/share: | $94.28 | ||||
| End price/share: | $158.84 | ||||
| Starting shares: | 106.07 | ||||
| Ending shares: | 131.18 | ||||
| Dividends reinvested/share: | $19.00 | ||||
| Total return: | 108.37% | ||||
| Average annual return: | 15.81% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $20,840.35 | ||||
As we can see, the five year investment result worked out exceptionally well, with an annualized rate of return of 15.81%. This would have turned a $10K investment made 5 years ago into $20,840.35 today (as of 04/23/2024). On a total return basis, that’s a result of 108.37% (something to think about: how might PSX shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Phillips 66 paid investors a total of $19.00/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 4.6/share, we calculate that PSX has a current yield of approximately 2.90%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 4.6 against the original $94.28/share purchase price. This works out to a yield on cost of 3.08%.
Here’s one more great investment quote before you go:
“Markets can remain irrational longer than you can remain solvent.” — John Maynard Keynes
