“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 two-decade holding period. Suppose such a “buy-and-hold” investor had looked into buying shares of American Electric Power Co Inc (NYSE: AEP) back in 1999. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
| Start date: | 07/09/1999 |
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| End date: | 07/08/2019 | ||||
| Start price/share: | $36.69 | ||||
| End price/share: | $89.93 | ||||
| Starting shares: | 272.57 | ||||
| Ending shares: | 689.18 | ||||
| Dividends reinvested/share: | $39.33 | ||||
| Total return: | 519.78% | ||||
| Average annual return: | 9.54% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $61,928.19 | ||||
As we can see, the two-decade investment result worked out well, with an annualized rate of return of 9.54%. This would have turned a $10K investment made 20 years ago into $61,928.19 today (as of 07/08/2019). On a total return basis, that’s a result of 519.78% (something to think about: how might AEP shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that American Electric Power Co Inc paid investors a total of $39.33/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 2.68/share, we calculate that AEP has a current yield of approximately 2.98%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2.68 against the original $36.69/share purchase price. This works out to a yield on cost of 8.12%.
Here’s one more great investment quote before you go:
“We ignore outlooks and forecasts… we’re lousy at it and we admit it … everyone else is lousy too, but most people won’t admit it.” — Martin Whitman
