“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:
|Average annual return:||9.54%|
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 forecastsâ€¦ we’re lousy at it and we admit it â€¦ everyone else is lousy too, but most people won’t admit it.” — Martin Whitman