“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
— 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 two-decade period?
Today, let’s look backwards in time to 2000, and take a look at what happened to investors who asked that very question about American Electric Power Co Inc (NASD: AEP), by taking a look at the investment outcome over a two-decade holding period.
| Start date: | 11/20/2000 |
|
|||
| End date: | 11/18/2020 | ||||
| Start price/share: | $43.19 | ||||
| End price/share: | $84.13 | ||||
| Starting shares: | 231.55 | ||||
| Ending shares: | 555.40 | ||||
| Dividends reinvested/share: | $39.94 | ||||
| Total return: | 367.26% | ||||
| Average annual return: | 8.01% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $46,725.54 | ||||
As we can see, the two-decade investment result worked out well, with an annualized rate of return of 8.01%. This would have turned a $10K investment made 20 years ago into $46,725.54 today (as of 11/18/2020). On a total return basis, that’s a result of 367.26% (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 $39.94/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 2.96/share, we calculate that AEP has a current yield of approximately 3.52%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2.96 against the original $43.19/share purchase price. This works out to a yield on cost of 8.15%.
One more investment quote to leave you with:
“Go for a business that any idiot can run – because sooner or later, any idiot probably is going to run it.” — Peter Lynch
