“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
— Warren Buffett
The wisdom of Warren Buffett reflects a value-based philosophy about investing that says investors are buying shares in a business, and encourages strategic thinking about investment time horizon. Before placing a buy order for a stock, a great question we can ask is whether we would still be comfortable making the investment if we couldn’t sell it for many years?
A “buy-and-hold” approach may call for a time horizon that spans a long period of time — maybe even lasting for a decade-long holding period. Suppose such a “buy-and-hold” investor had looked into buying shares of American Electric Power Co Inc (NASD: AEP) back in 2011. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
| Start date: | 07/07/2011 |
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| End date: | 07/06/2021 | ||||
| Start price/share: | $38.52 | ||||
| End price/share: | $85.24 | ||||
| Starting shares: | 259.61 | ||||
| Ending shares: | 378.85 | ||||
| Dividends reinvested/share: | $23.16 | ||||
| Total return: | 222.93% | ||||
| Average annual return: | 12.43% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $32,292.44 | ||||
The above analysis shows the decade-long investment result worked out quite well, with an annualized rate of return of 12.43%. This would have turned a $10K investment made 10 years ago into $32,292.44 today (as of 07/06/2021). On a total return basis, that’s a result of 222.93% (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.]
Notice that American Electric Power Co Inc paid investors a total of $23.16/share in dividends over the 10 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 3.47%. 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 $38.52/share purchase price. This works out to a yield on cost of 9.01%.
Another great investment quote to think about:
“When the public is most frightened, only the strong are left, and that’s when the market is in the best possible hands.” — Victor Niederhoffer
