Investing regularly to capitalise on the power of compounding is possibly one the best ways to use your savings to work for your golden years in retirement.
Today, I’d like to take a look at share prices of oil giant BP (LSE: BP) and supermarket chain Tesco (LSE:TSCO) and see how £1,000 invested in either one would have done over the past five years. I’ll also discuss what investors may possibly expect from both companies in 2020.
Reading the numbers
Under each company name, I state how the price has changed over the past five years and what this change equates to in terms of the compound annual growth rate (CAGR). Then, I show how £1,000 would have fared over five years.
Please note that both companies pay regular dividends that can also be reinvested. But the calculation below does not take into consideration the actual dividend or the reinvestment of that income. Past prices are as of late December 2014. Current prices are as of close on 20 December.
Finally, I have not factored in any brokerage commissions or taxes.
The share price has increased from 413p to 484.9p
£1,000 would have become £1,173.98.
At the time of writing, the stock also provides an attractive 6.5% dividend yield and the shares are expected to go ex-dividend next in February 2020. Passive-income investors may also enjoy that it makes quarterly dividend payments.
After declaring no dividends during most of 2010 to pay for the oil spill disaster at the time, over the past decade, the company has been a consistent dividend payer and has also increased its payouts regularly.
So should you invest in the shares now? I see value in holding an oil company in a long-term portfolio and BP would be one of my top choices. Investors should remember that the stock price moves mostly in tandem with oil prices, which are cyclical and volatile.
On 29 October, the group reported Q3 2019 results. I am especially encouraged by its strong operating cash flow that can be seen as a sign of financial strength and efficiency. I am also comfortable with its forward P/E ratio of 12.7.
The share price has increased from 185.4p to 252.1p
£1,000 would have become £1,359.83.
On 2 October, the group released solid half-year trading results. As of September 2019, the group has a 26.9% share of Britain’s grocery market. It is also one of the world’s top five retailers with a vast distribution network.
Tesco’s current dividend yield stands at 2.7%. The stock is expected to go ex-dividend in May 2020. As a result of the recent robust results, management hiked its dividend by 58.7%.
After a few rough years, I believe management now has a viable strategy for sustainable growth.
In early December, the shares surged when the retailer said that it was reviewing its remaining Asian business, including Thailand and Malaysia – valued at about £6.5bn.
Its forward P/E stands at 14.9. And I’d be a buyer of Tesco shares at every dip.
The Foolish takeaway
My Motley Fool colleagues regularly cover FTSE 100 and FTSE 250 shares as well as funds to consider adding to a diversified portfolio. They point out that the stock market returns about 7% to 9% annually on average.
I believe the numbers above from BP and TSCO indeed show that robust returns are likely to be achieved in the future too, especially when one reinvests the dividend income as well.
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tezcang has BP covered calls (December 27 expiry) on BP ADR shares listed on NYSE. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.