“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
— 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 decade-long period?
Today, let’s look backwards in time to 2009, and take a look at what happened to investors who asked that very question about American Electric Power Co Inc (NYSE: AEP), by taking a look at the investment outcome over a decade-long holding period.
| Start date: | 07/24/2009 |
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| End date: | 07/23/2019 | ||||
| Start price/share: | $30.94 | ||||
| End price/share: | $89.51 | ||||
| Starting shares: | 323.21 | ||||
| Ending shares: | 489.04 | ||||
| Dividends reinvested/share: | $20.92 | ||||
| Total return: | 337.74% | ||||
| Average annual return: | 15.91% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $43,790.99 | ||||
The above analysis shows the decade-long investment result worked out exceptionally well, with an annualized rate of return of 15.91%. This would have turned a $10K investment made 10 years ago into $43,790.99 today (as of 07/23/2019). On a total return basis, that’s a result of 337.74% (something to think about: how might AEP shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that American Electric Power Co Inc paid investors a total of $20.92/share in dividends over the 10 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 2.68/share, we calculate that AEP has a current yield of approximately 2.99%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2.68 against the original $30.94/share purchase price. This works out to a yield on cost of 9.66%.
Another great investment quote to think about:
“I believe in the discipline of mastering the best that other people have ever figured out. I don’t believe in just sitting down and trying to dream it all up yourself. Nobody’s that smart.” — Charlie Munger
