“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:
|Average annual return:||7.38%|
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