“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
— Warren Buffett
One of the most important things investors can learn from Warren Buffett, is about how they approach their time horizon for an investment into a stock under consideration. Because immediately after buying shares of a given stock, investors will then be able to check on the day-to-day (and even minute-by-minute) market value. Some days the stock market will be up, other days down. These daily fluctuations can often distract from the long-term view. Today, we look at the result of a decade-long holding period for an investor who was considering Advance Auto Parts Inc (NYSE: AAP) back in 2010, bought the stock, ignored the market’s ups and downs, and simply held through to today.
|Average annual return:||11.13%|
As we can see, the decade-long investment result worked out quite well, with an annualized rate of return of 11.13%. This would have turned a $10K investment made 10 years ago into $28,745.13 today (as of 07/15/2020). On a total return basis, that’s a result of 187.38% (something to think about: how might AAP shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Many investors out there refuse to own any stock that lacks a dividend; in the case of Advance Auto Parts Inc, investors have received $2.78/share in dividends these past 10 years examined in the exercise above. This means total return was driven not just by share price, but also by the dividends received (and what the investor did with those dividends). For this exercise, what we’ve done with the dividends is to assume they are reinvestted — i.e. used to purchase additional shares (the calculations use closing price on ex-date).
Based upon the most recent annualized dividend rate of 1/share, we calculate that AAP has a current yield of approximately 0.70%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1 against the original $51.34/share purchase price. This works out to a yield on cost of 1.36%.
More investment wisdom to ponder:
“A lot of people with high IQs are terrible investors because they’ve got terrible temperaments. You need to keep raw, irrational emotion under control.” — Charlie Munger