“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
— 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 two-decade holding period possibly?
Suppose a “buy-and-hold” investor was considering an investment into American Express Co. (NYSE: AXP) back in 2002: back then, such an investor may have been pondering this very same question. Had they answered “yes” to a full two-decade investment time horizon and then actually held for these past 20 years, here’s how that investment would have turned out.
| Start date: | 11/14/2002 |
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| End date: | 11/11/2022 | ||||
| Start price/share: | $32.34 | ||||
| End price/share: | $154.89 | ||||
| Starting shares: | 309.21 | ||||
| Ending shares: | 412.66 | ||||
| Dividends reinvested/share: | $19.83 | ||||
| Total return: | 539.16% | ||||
| Average annual return: | 9.72% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $63,964.16 | ||||
As we can see, the two-decade investment result worked out well, with an annualized rate of return of 9.72%. This would have turned a $10K investment made 20 years ago into $63,964.16 today (as of 11/11/2022). On a total return basis, that’s a result of 539.16% (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 $19.83/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 2.08/share, we calculate that AXP has a current yield of approximately 1.34%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2.08 against the original $32.34/share purchase price. This works out to a yield on cost of 4.14%.
Another great investment quote to think about:
“Everyone has the brainpower to make money in stocks. Not everyone has the stomach. If you are susceptible to selling everything in a panic, you ought to avoid stocks and mutual funds altogether.” — Peter Lynch
AXP
