“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 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 ten year holding period, will the investment succeed?
Back in 2010, investors may have been asking themselves that very question about Advance Auto Parts Inc (NYSE: AAP). Let’s examine what would have happened over a ten year holding period, had you invested in AAP shares back in 2010 and held on.
|Average annual return:||9.37%|
The above analysis shows the ten year investment result worked out well, with an annualized rate of return of 9.37%. This would have turned a $10K investment made 10 years ago into $24,501.65 today (as of 12/30/2020). On a total return basis, that’s a result of 145.05% (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 $3.16/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 0.63%. 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 $66.15/share purchase price. This works out to a yield on cost of 0.95%.
Here’s one more great investment quote before you go:
“As time goes on, I get more and more convinced that the right method of investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes.” — John Maynard Keynes