“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett
The wisdom of Warren Buffett reflects a value-based philosophy about investing that says investors are buying shares in a business, and encourages strategic thinking about investment time horizon. Before placing a buy order for a stock, a great question we can ask is whether we would still be comfortable making the investment if we couldn’t sell it for many years?
A “buy-and-hold” approach may call for a time horizon that spans a long period of time — maybe even lasting for a five year holding period. Suppose such a “buy-and-hold” investor had looked into buying shares of American Water Works Co, Inc. (NYSE: AWK) back in 2014. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
| Start date: | 03/20/2014 |
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| End date: | 03/19/2019 | ||||
| Start price/share: | $44.66 | ||||
| End price/share: | $104.35 | ||||
| Starting shares: | 223.91 | ||||
| Ending shares: | 249.87 | ||||
| Dividends reinvested/share: | $7.58 | ||||
| Total return: | 160.74% | ||||
| Average annual return: | 21.13% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $26,077.06 | ||||
As shown above, the five year investment result worked out exceptionally well, with an annualized rate of return of 21.13%. This would have turned a $10K investment made 5 years ago into $26,077.06 today (as of 03/19/2019). On a total return basis, that’s a result of 160.74% (something to think about: how might AWK shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Always an important consideration with a dividend-paying company is: should we reinvest our dividends?Over the past 5 years, American Water Works Co, Inc. has paid $7.58/share in dividends. For the above analysis, we assume that the investor reinvests dividends into new shares of stock (for the above calculations, the reinvestment is performed using closing price on ex-div date for that dividend).
Based upon the most recent annualized dividend rate of 1.82/share, we calculate that AWK has a current yield of approximately 1.74%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.82 against the original $44.66/share purchase price. This works out to a yield on cost of 3.90%.
More investment wisdom to ponder:
“In the long run, it’s not just how much money you make that will determine your future prosperity. It’s how much of that money you put to work by saving it and investing it.” — Peter Lynch
