“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
— Warren Buffett
The above quote from Warren Buffett is timeless, and brings into focus the choice about time horizon that any investor should think about before buying a stock they are considering. Behind every stock is an actual business; what will that business look like over a two-decade period?
Today, let’s look backwards in time to 2002, and take a look at what happened to investors who asked that very question about Advance Auto Parts Inc (NYSE: AAP), by taking a look at the investment outcome over a two-decade holding period.
| Start date: | 10/14/2002 |
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| End date: | 10/13/2022 | ||||
| Start price/share: | $18.72 | ||||
| End price/share: | $171.58 | ||||
| Starting shares: | 534.19 | ||||
| Ending shares: | 588.53 | ||||
| Dividends reinvested/share: | $12.05 | ||||
| Total return: | 909.81% | ||||
| Average annual return: | 12.25% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $100,989.68 | ||||
As shown above, the two-decade investment result worked out quite well, with an annualized rate of return of 12.25%. This would have turned a $10K investment made 20 years ago into $100,989.68 today (as of 10/13/2022). On a total return basis, that’s a result of 909.81% (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.]
Notice that Advance Auto Parts Inc paid investors a total of $12.05/share in dividends over the 20 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 6/share, we calculate that AAP has a current yield of approximately 3.50%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 6 against the original $18.72/share purchase price. This works out to a yield on cost of 18.70%.
More investment wisdom to ponder:
“When you sell in desperation, you always sell cheap.” — Peter Lynch
