“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 2015, 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: | 12/18/2015 |
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| End date: | 12/17/2020 | ||||
| Start price/share: | $67.87 | ||||
| End price/share: | $118.98 | ||||
| Starting shares: | 147.34 | ||||
| Ending shares: | 159.86 | ||||
| Dividends reinvested/share: | $7.26 | ||||
| Total return: | 90.21% | ||||
| Average annual return: | 13.71% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $19,017.18 | ||||
As we can see, the five year investment result worked out quite well, with an annualized rate of return of 13.71%. This would have turned a $10K investment made 5 years ago into $19,017.18 today (as of 12/17/2020). On a total return basis, that’s a result of 90.21% (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 $7.26/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 1.72/share, we calculate that AXP has a current yield of approximately 1.45%. 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 $67.87/share purchase price. This works out to a yield on cost of 2.14%.
Here’s one more great investment quote before you go:
“Never is there a better time to buy a stock than when a basically sound company, for whatever reason, temporarily falls out of favor with the investment community.” — Geraldine Weiss
