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“I buy on the assumption that they could close the market the next day and not reopen it for five years.”

— Warren Buffett

The above quote from Warren Buffett is timeless, and brings into focus the choice about time horizon that any investor should think about before buying a stock they are considering. Behind every stock is an actual business; what will that business look like over a five year period?

Today, let’s look backwards in time to 2014, and take a look at what happened to investors who asked that very question about American Electric Power Co Inc (NYSE: AEP), by taking a look at the investment outcome over a five year holding period.

Start date: 12/02/2014


End date: 11/29/2019
Start price/share: $58.36
End price/share: $91.35
Starting shares: 171.35
Ending shares: 204.35
Dividends reinvested/share: $12.05
Total return: 86.67%
Average annual return: 13.31%
Starting investment: $10,000.00
Ending investment: $18,665.68

As shown above, the five year investment result worked out quite well, with an annualized rate of return of 13.31%. This would have turned a $10K investment made 5 years ago into $18,665.68 today (as of 11/29/2019). On a total return basis, that’s a result of 86.67% (something to think about: how might AEP shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]

Notice that American Electric Power Co Inc paid investors a total of $12.05/share in dividends over the 5 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 AEP has a current yield of approximately 3.07%. 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 $58.36/share purchase price. This works out to a yield on cost of 5.26%.

More investment wisdom to ponder:
“Cash is a fact, profit is an opinion.” — Alfred Rappaport