“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”
— Warren Buffett
Investors can learn a lot from Warren Buffett, whose above quote teaches the importance of thinking about investment time horizon, and asking ourselves before buying any given stock: can we envision holding onto it for years — even a two-decade holding period possibly?
Suppose a “buy-and-hold” investor was considering an investment into Advance Auto Parts Inc (NYSE: AAP) back in 2001: back then, such an investor may have been pondering this very same question. Had they answered “yes” to a full two-decade investment time horizon and then actually held for these past 20 years, here’s how that investment would have turned out.
| Start date: | 12/28/2001 |
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| End date: | 12/27/2021 | ||||
| Start price/share: | $15.69 | ||||
| End price/share: | $236.50 | ||||
| Starting shares: | 637.35 | ||||
| Ending shares: | 684.77 | ||||
| Dividends reinvested/share: | $7.55 | ||||
| Total return: | 1,519.49% | ||||
| Average annual return: | 14.93% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $161,931.16 | ||||
As we can see, the two-decade investment result worked out quite well, with an annualized rate of return of 14.93%. This would have turned a $10K investment made 20 years ago into $161,931.16 today (as of 12/27/2021). On a total return basis, that’s a result of 1,519.49% (something to think about: how might AAP shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Dividends are always an important investment factor to consider, and Advance Auto Parts Inc has paid $7.55/share in dividends to shareholders over the past 20 years we looked at above. Many an investor will only invest in stocks that pay dividends, so this component of total return is always an important consideration. Automated reinvestment of dividends into additional shares of stock can be a great way for an investor to compound their returns. The above calculations are done with the assuption that dividends received over time are reinvested (the calcuations use the closing price on ex-date).
Based upon the most recent annualized dividend rate of 4/share, we calculate that AAP has a current yield of approximately 1.69%. 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 $15.69/share purchase price. This works out to a yield on cost of 10.77%.
Another great investment quote to think about:
“I think you have to learn that there’s a company behind every stock, and that there’s only one real reason why stocks go up. Companies go from doing poorly to doing well or small companies grow to large companies.” — Peter Lynch
