“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett
The Warren Buffett investment philosophy calls for a long-term investment horizon, where a five year holding period, or even longer, would fit right into the strategy. How would such a strategy have worked out for an investment into NRG Energy Inc (NYSE: NRG)? Today, we examine the outcome of a five year investment into the stock back in 2014.
| Start date: | 07/02/2014 |
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| End date: | 07/01/2019 | ||||
| Start price/share: | $35.76 | ||||
| End price/share: | $35.43 | ||||
| Starting shares: | 279.64 | ||||
| Ending shares: | 300.24 | ||||
| Dividends reinvested/share: | $1.40 | ||||
| Total return: | 6.38% | ||||
| Average annual return: | 1.24% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $10,635.57 | ||||
The above analysis shows the five year investment result worked out as follows, with an annualized rate of return of 1.24%. This would have turned a $10K investment made 5 years ago into $10,635.57 today (as of 07/01/2019). On a total return basis, that’s a result of 6.38% (something to think about: how might NRG shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that NRG Energy Inc paid investors a total of $1.40/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 .12/share, we calculate that NRG has a current yield of approximately 0.34%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of .12 against the original $35.76/share purchase price. This works out to a yield on cost of 0.95%.
One more piece of investment wisdom to leave you with:
“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
