“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”
— 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 two-decade holding period. Suppose such a “buy-and-hold” investor had looked into buying shares of American Electric Power Co Inc (NASD: AEP) back in 2004. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
| Start date: | 11/18/2004 |
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| End date: | 11/15/2024 | ||||
| Start price/share: | $34.19 | ||||
| End price/share: | $96.31 | ||||
| Starting shares: | 292.48 | ||||
| Ending shares: | 647.25 | ||||
| Dividends reinvested/share: | $45.20 | ||||
| Total return: | 523.37% | ||||
| Average annual return: | 9.58% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $62,351.03 | ||||
As shown above, the two-decade investment result worked out well, with an annualized rate of return of 9.58%. This would have turned a $10K investment made 20 years ago into $62,351.03 today (as of 11/15/2024). On a total return basis, that’s a result of 523.37% (something to think about: how might AEP 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 American Electric Power Co Inc, investors have received $45.20/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 3.72/share, we calculate that AEP has a current yield of approximately 3.86%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 3.72 against the original $34.19/share purchase price. This works out to a yield on cost of 11.29%.
More investment wisdom to ponder:
“Sometimes buying early on the way down looks like being wrong, but it isn’t.” — Seth Klarman
