“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 twenty year period?
Today, let’s look backwards in time to 2003, 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 twenty year holding period.
| Start date: | 05/19/2003 |
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| End date: | 05/17/2023 | ||||
| Start price/share: | $20.00 | ||||
| End price/share: | $122.10 | ||||
| Starting shares: | 500.00 | ||||
| Ending shares: | 563.41 | ||||
| Dividends reinvested/share: | $15.05 | ||||
| Total return: | 587.93% | ||||
| Average annual return: | 10.12% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $68,812.63 | ||||
As we can see, the twenty year investment result worked out quite well, with an annualized rate of return of 10.12%. This would have turned a $10K investment made 20 years ago into $68,812.63 today (as of 05/17/2023). On a total return basis, that’s a result of 587.93% (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.]
Many investors out there refuse to own any stock that lacks a dividend; in the case of Advance Auto Parts Inc, investors have received $15.05/share in dividends these past 20 years examined in the exercise above. This means total return was driven not just by share price, but also by the dividends received (and what the investor did with those dividends). For this exercise, what we’ve done with the dividends is to assume they are reinvestted — i.e. used to purchase additional shares (the calculations use closing price on ex-date).
Based upon the most recent annualized dividend rate of 6/share, we calculate that AAP has a current yield of approximately 4.91%. 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 $20.00/share purchase price. This works out to a yield on cost of 24.55%.
More investment wisdom to ponder:
“Wide diversification is only required when investors do not understand what they are doing.” — Warren Buffett
