“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”
— Warren Buffett
One of the most important things investors can learn from Warren Buffett, is about how they approach their time horizon for an investment into a stock under consideration. Because immediately after buying shares of a given stock, investors will then be able to check on the day-to-day (and even minute-by-minute) market value. Some days the stock market will be up, other days down. These daily fluctuations can often distract from the long-term view. Today, we look at the result of a twenty year holding period for an investor who was considering American Electric Power Co Inc (NASD: AEP) back in 2002, bought the stock, ignored the market’s ups and downs, and simply held through to today.
| Start date: | 01/11/2002 |
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| End date: | 01/10/2022 | ||||
| Start price/share: | $43.87 | ||||
| End price/share: | $90.50 | ||||
| Starting shares: | 227.95 | ||||
| Ending shares: | 537.12 | ||||
| Dividends reinvested/share: | $40.54 | ||||
| Total return: | 386.10% | ||||
| Average annual return: | 8.22% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $48,587.73 | ||||
As shown above, the twenty year investment result worked out well, with an annualized rate of return of 8.22%. This would have turned a $10K investment made 20 years ago into $48,587.73 today (as of 01/10/2022). On a total return basis, that’s a result of 386.10% (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.]
Beyond share price change, another component of AEP’s total return these past 20 years has been the payment by American Electric Power Co Inc of $40.54/share in dividends to shareholders. Automatic reinvestment of dividends can be a wonderful way to compound returns, and for the above calculations we presume that dividends are reinvested into additional shares of stock. (For the purpose of these calcuations, the closing price on ex-date is used).
Based upon the most recent annualized dividend rate of 3.12/share, we calculate that AEP has a current yield of approximately 3.45%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 3.12 against the original $43.87/share purchase price. This works out to a yield on cost of 7.86%.
One more piece of investment wisdom to leave you with:
“Taking risks is really the only way to consistently achieve above-average returns.” — Sam Zell
