“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett
Investors can learn a lot from Warren Buffett, whose above quote teaches the importance of thinking about investment time horizon, and asking ourselves before buying any given stock: can we envision holding onto it for years — even a five year holding period possibly?
Suppose a “buy-and-hold” investor was considering an investment into AES Corp. (NYSE: AES) back in 2015: back then, such an investor may have been pondering this very same question. Had they answered “yes” to a full five year investment time horizon and then actually held for these past 5 years, here’s how that investment would have turned out.
| Start date: | 01/29/2015 |
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| End date: | 01/28/2020 | ||||
| Start price/share: | $12.44 | ||||
| End price/share: | $20.18 | ||||
| Starting shares: | 803.86 | ||||
| Ending shares: | 970.08 | ||||
| Dividends reinvested/share: | $2.39 | ||||
| Total return: | 95.76% | ||||
| Average annual return: | 14.38% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $19,577.19 | ||||
As we can see, the five year investment result worked out quite well, with an annualized rate of return of 14.38%. This would have turned a $10K investment made 5 years ago into $19,577.19 today (as of 01/28/2020). On a total return basis, that’s a result of 95.76% (something to think about: how might AES 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, AES Corp. has paid $2.39/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 .5732/share, we calculate that AES has a current yield of approximately 2.84%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of .5732 against the original $12.44/share purchase price. This works out to a yield on cost of 22.83%.
Here’s one more great investment quote before you go:
“You can’t be a good value investor without being an independent thinker; you’re seeing valuations that the market is not appreciating. But it’s critical that you understand why the market isn’t seeing the value you do.” — Joel Greenblatt
