“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett
A critical pearl of wisdom from Warren Buffett teaches us that with any potential stock investment we may make, as soon as our buy order is filled we will have a choice: to remain a co-owner of that company for the long haul, or to react to the inevitable short-term ups and downs that the stock market is famous for (sometimes sharp ups and downs).
The reality of this choice forces us to challenge our confidence in any given company we might invest into, and keep our eyes on the long-term time horizon. The market may go up and down the interim, but over a five year holding period, will the investment succeed?
Back in 2015, investors may have been asking themselves that very question about American Electric Power Co Inc (NYSE: AEP). Let’s examine what would have happened over a five year holding period, had you invested in AEP shares back in 2015 and held on.
| Start date: | 02/20/2015 |
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| End date: | 02/19/2020 | ||||
| Start price/share: | $58.72 | ||||
| End price/share: | $103.50 | ||||
| Starting shares: | 170.30 | ||||
| Ending shares: | 202.68 | ||||
| Dividends reinvested/share: | $12.22 | ||||
| Total return: | 109.78% | ||||
| Average annual return: | 15.97% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $20,976.27 | ||||
As we can see, the five year investment result worked out exceptionally well, with an annualized rate of return of 15.97%. This would have turned a $10K investment made 5 years ago into $20,976.27 today (as of 02/19/2020). On a total return basis, that’s a result of 109.78% (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.]
Beyond share price change, another component of AEP’s total return these past 5 years has been the payment by American Electric Power Co Inc of $12.22/share in dividends to shareholders. Automatic reinvestment of dividends can be a wonderful way to compound returns, and for the above calculations we presume that dividends are reinvested into additional shares of stock. (For the purpose of these calcuations, the closing price on ex-date is used).
Based upon the most recent annualized dividend rate of 2.8/share, we calculate that AEP has a current yield of approximately 2.71%. 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 $58.72/share purchase price. This works out to a yield on cost of 4.62%.
One more investment quote to leave you with:
“The stock market is the story of cycles and of the human behavior that is responsible for overreactions in both directions.” — Seth Klarman
