“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 2014, investors considering an investment into shares of American Express Co. (NYSE: AXP) 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: | 06/20/2014 |
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| End date: | 06/19/2019 | ||||
| Start price/share: | $95.54 | ||||
| End price/share: | $124.68 | ||||
| Starting shares: | 104.67 | ||||
| Ending shares: | 112.99 | ||||
| Dividends reinvested/share: | $6.34 | ||||
| Total return: | 40.87% | ||||
| Average annual return: | 7.09% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $14,084.60 | ||||
As we can see, the five year investment result worked out well, with an annualized rate of return of 7.09%. This would have turned a $10K investment made 5 years ago into $14,084.60 today (as of 06/19/2019). On a total return basis, that’s a result of 40.87% (something to think about: how might AXP shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that American Express Co. paid investors a total of $6.34/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 1.56/share, we calculate that AXP has a current yield of approximately 1.25%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.56 against the original $95.54/share purchase price. This works out to a yield on cost of 1.31%.
More investment wisdom to ponder:
“To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.” — Benjamin Graham
