“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 2019, investors considering an investment into shares of Merck & Co Inc (NYSE: MRK) 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: | 12/17/2019 |
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| End date: | 12/16/2024 | ||||
| Start price/share: | $84.94 | ||||
| End price/share: | $100.06 | ||||
| Starting shares: | 117.73 | ||||
| Ending shares: | 137.13 | ||||
| Dividends reinvested/share: | $13.86 | ||||
| Total return: | 37.21% | ||||
| Average annual return: | 6.53% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $13,722.55 | ||||
The above analysis shows the five year investment result worked out well, with an annualized rate of return of 6.53%. This would have turned a $10K investment made 5 years ago into $13,722.55 today (as of 12/16/2024). On a total return basis, that’s a result of 37.21% (something to think about: how might MRK shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Merck & Co Inc paid investors a total of $13.86/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 3.24/share, we calculate that MRK has a current yield of approximately 3.24%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 3.24 against the original $84.94/share purchase price. This works out to a yield on cost of 3.81%.
More investment wisdom to ponder:
“This company looks cheap, that company looks cheap, but the overall economy could completely screw it up. The key is to wait. Sometimes the hardest thing to do is to do nothing.” — David Tepper
