“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
— Warren Buffett
This inspiring quote from Warren Buffett teaches us the importance of considering our investment time horizon when approaching any given investment: Could we envision ourselves holding the stock we are considering for many years? Even a ten year holding period potentially?
For “buy-and-hold” investors taking a long-term view, what’s important isn’t the short-term stock market fluctuations that will inevitably occur, but what happens over the long haul. Looking back 10 years to 2010, investors considering an investment into shares of American Electric Power Co Inc (NYSE: AEP) may have been pondering this very question and thinking about their potential investment result over a full ten year time horizon. Here’s how that would have worked out.
| Start date: | 08/06/2010 |
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| End date: | 08/05/2020 | ||||
| Start price/share: | $35.98 | ||||
| End price/share: | $84.83 | ||||
| Starting shares: | 277.93 | ||||
| Ending shares: | 411.90 | ||||
| Dividends reinvested/share: | $22.04 | ||||
| Total return: | 249.41% | ||||
| Average annual return: | 13.32% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $34,943.24 | ||||
The above analysis shows the ten year investment result worked out quite well, with an annualized rate of return of 13.32%. This would have turned a $10K investment made 10 years ago into $34,943.24 today (as of 08/05/2020). On a total return basis, that’s a result of 249.41% (something to think about: how might AEP 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 American Electric Power Co Inc, investors have received $22.04/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 2.8/share, we calculate that AEP has a current yield of approximately 3.30%. 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 $35.98/share purchase price. This works out to a yield on cost of 9.17%.
One more piece of investment wisdom to leave you with:
“You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.” — Peter Lynch
