“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
— Warren Buffett
A critical pearl of wisdom from Warren Buffett teaches us that with any potential stock investment we may make, as soon as our buy order is filled we will have a choice: to remain a co-owner of that company for the long haul, or to react to the inevitable short-term ups and downs that the stock market is famous for (sometimes sharp ups and downs).
The reality of this choice forces us to challenge our confidence in any given company we might invest into, and keep our eyes on the long-term time horizon. The market may go up and down the interim, but over a decade-long holding period, will the investment succeed?
Back in 2010, investors may have been asking themselves that very question about American Express Co. (NYSE: AXP). Let’s examine what would have happened over a decade-long holding period, had you invested in AXP shares back in 2010 and held on.
| Start date: | 05/13/2010 |
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| End date: | 05/12/2020 | ||||
| Start price/share: | $42.81 | ||||
| End price/share: | $83.14 | ||||
| Starting shares: | 233.59 | ||||
| Ending shares: | 271.08 | ||||
| Dividends reinvested/share: | $11.20 | ||||
| Total return: | 125.38% | ||||
| Average annual return: | 8.46% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $22,536.64 | ||||
As shown above, the decade-long investment result worked out well, with an annualized rate of return of 8.46%. This would have turned a $10K investment made 10 years ago into $22,536.64 today (as of 05/12/2020). On a total return basis, that’s a result of 125.38% (something to think about: how might AXP shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that American Express Co. paid investors a total of $11.20/share in dividends over the 10 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 1.72/share, we calculate that AXP has a current yield of approximately 2.07%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.72 against the original $42.81/share purchase price. This works out to a yield on cost of 4.84%.
One more piece of investment wisdom to leave you with:
“The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.” — Warren Buffett
