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“I buy on the assumption that they could close the market the next day and not reopen it for five 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 five year holding period. Suppose such a “buy-and-hold” investor had looked into buying shares of Advance Auto Parts Inc (NYSE: AAP) back in 2016. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:

Start date: 09/21/2016


End date: 09/20/2021
Start price/share: $146.33
End price/share: $203.71
Starting shares: 68.34
Ending shares: 70.08
Dividends reinvested/share: $4.09
Total return: 42.76%
Average annual return: 7.38%
Starting investment: $10,000.00
Ending investment: $14,276.34

As we can see, the five year investment result worked out well, with an annualized rate of return of 7.38%. This would have turned a $10K investment made 5 years ago into $14,276.34 today (as of 09/20/2021). On a total return basis, that’s a result of 42.76% (something to think about: how might AAP shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]

Notice that Advance Auto Parts Inc paid investors a total of $4.09/share in dividends over the 5 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 4/share, we calculate that AAP has a current yield of approximately 1.96%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 4 against the original $146.33/share purchase price. This works out to a yield on cost of 1.34%.

One more piece of investment wisdom to leave you with:
“Every once in a while, the market does something so stupid it takes your breath away.” — Jim Cramer