“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
— Warren Buffett
The above quote from Warren Buffett is timeless, and brings into focus the choice about time horizon that any investor should think about before buying a stock they are considering. Behind every stock is an actual business; what will that business look like over a twenty year period?
Today, let’s look backwards in time to 2001, and take a look at what happened to investors who asked that very question about American Express Co. (NYSE: AXP), by taking a look at the investment outcome over a twenty year holding period.
|Average annual return:||9.13%|
As shown above, the twenty year investment result worked out well, with an annualized rate of return of 9.13%. This would have turned a $10K investment made 20 years ago into $57,409.94 today (as of 05/28/2021). On a total return basis, that’s a result of 473.63% (something to think about: how might AXP shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that American Express Co. paid investors a total of $17.40/share in dividends over the 20 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 1.07%. 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 $37.10/share purchase price. This works out to a yield on cost of 2.88%.
Another great investment quote to think about:
“Investors should purchase stocks like they purchase groceries, not like they purchase perfume.” — Benjamin Graham