“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”
— Warren Buffett
The wisdom of Warren Buffett reflects a value-based philosophy about investing that says investors are buying shares in a business, and encourages strategic thinking about investment time horizon. Before placing a buy order for a stock, a great question we can ask is whether we would still be comfortable making the investment if we couldn’t sell it for many years?
A “buy-and-hold” approach may call for a time horizon that spans a long period of time — maybe even lasting for a twenty year holding period. Suppose such a “buy-and-hold” investor had looked into buying shares of American Express Co. (NYSE: AXP) back in 2004. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
| Start date: | 07/29/2004 |
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| End date: | 07/26/2024 | ||||
| Start price/share: | $43.73 | ||||
| End price/share: | $245.89 | ||||
| Starting shares: | 228.68 | ||||
| Ending shares: | 307.98 | ||||
| Dividends reinvested/share: | $23.57 | ||||
| Total return: | 657.28% | ||||
| Average annual return: | 10.65% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $75,730.22 | ||||
The above analysis shows the twenty year investment result worked out quite well, with an annualized rate of return of 10.65%. This would have turned a $10K investment made 20 years ago into $75,730.22 today (as of 07/26/2024). On a total return basis, that’s a result of 657.28% (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 $23.57/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 2.8/share, we calculate that AXP has a current yield of approximately 1.14%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2.8 against the original $43.73/share purchase price. This works out to a yield on cost of 2.61%.
One more investment quote to leave you with:
“Never test the depth of a river with both feet.” — Warren Buffett
