“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
— Warren Buffett
One of the most important disciplines investors can take from Warren Buffett is the way they think about time horizon. After purchasing a stock, it becomes all too easy to focus on day-to-day or even minute-by-minute price moves. Some sessions the broader equity market will be higher, other days lower, and individual shares can be more volatile still. For long-term investors, these short-term fluctuations can distract from the core question: what is the business likely to deliver over a full investment cycle?
To illustrate the value of patience, we examine the result of a decade-long holding period in American Electric Power Co Inc (NASD: AEP). We consider an investor who committed capital to AEP in early 2016, then simply held the position and reinvested all dividends through to March 2026, ignoring the interim noise.
| Start date: | 03/28/2016 |
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| End date: | 03/24/2026 | ||||
| Start price/share: | $65.00 | ||||
| End price/share: | $128.80 | ||||
| Starting shares: | 153.85 | ||||
| Ending shares: | 218.62 | ||||
| Dividends reinvested/share: | $29.98 | ||||
| Total return: | 181.58% | ||||
| Average annual return: | 10.91% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $28,148.85 | ||||
As shown above, the ten-year investment outcome worked out strongly in this scenario, with an annualized rate of return of 10.91%. Compounded over a decade, that would have turned a $10,000 investment made in March 2016 into approximately $28,148.85 as of 03/24/2026. On a total return basis, including price appreciation and dividends reinvested, that equates to 181.58%.
It is worth emphasizing that this period spans multiple market environments: the late-cycle phase of the 2010s, the COVID-19 driven sell-off and recovery around 2020, and subsequent moves in interest rates that affected defensive, income-oriented sectors such as utilities. Through those macro shifts, an investor who simply held AEP and reinvested distributions earned a result that compares favorably with long-run U.S. equity return assumptions for a regulated utility.
These numbers were computed with the Dividend Channel DRIP Returns Calculator, which assumes dividend reinvestment at the closing price on the ex-dividend date and does not factor in taxes, transaction costs, or individual investor circumstances.
The Role Of Dividends And Reinvestment
Always an important consideration with a dividend-paying company is whether to reinvest dividends or to take them in cash. Over the past 10 years, American Electric Power Co Inc has paid $29.98 per share in dividends in this analysis. For the return figures above, we assume that the investor reinvests all cash dividends into new AEP shares. Over time, this dividend reinvestment plan (DRIP) effect increases the share count from 153.85 at inception to 218.62 by March 2026.
This compounding in share count is a central driver of total return for income-oriented equities. Each additional share purchased with dividends themselves generates future dividends, which can in turn be reinvested. In the case of AEP, that compounding took place against the backdrop of relatively steady cash flows, underpinned by its regulated electric utility operations across several U.S. states.
Investors should also note that while this illustration uses automatic reinvestment on the ex-dividend date, real-world outcomes can differ due to execution prices, brokerage policies, and tax treatment of dividends in taxable accounts.
Current Yield Versus Yield On Cost
Based upon the most recent annualized dividend rate of 3.8 per share, we calculate that AEP has a current yield of approximately 2.95% on the ending share price used in this example. That figure is relevant for prospective investors today, as it expresses the income generated over the next 12 months as a percentage of the current share price.
Another interesting data point is “yield on cost” — in other words, expressing the current annualized dividend of 3.8 against the original $65.00 per share purchase price. This works out to a yield on cost of 4.54%. While yield on cost is not a metric used for securities pricing, it can be a useful way for long-term holders to gauge how their portfolio income stream has grown relative to the dollars originally invested.
In the case of AEP, yield on cost benefited from two factors over the period in question: the increase in the share price itself and management’s pattern of gradually raising the dividend over time. Like many large regulated utilities, AEP has historically targeted a payout ratio that allows for incremental dividend growth in line with earnings and allowed returns on equity set by regulators.
AEP In Context: Utility Characteristics And Risk Considerations
American Electric Power is one of the largest investor-owned electric utilities in the United States, with operations spanning transmission, distribution, and generation. Utilities of this type are often sought out by income-focused investors due to their regulated revenue models, which can provide more predictable cash flows than many cyclical industries.
That said, a 10.91% annualized return over a decade is not risk-free. Along the way, AEP shareholders were exposed to:
- Interest rate sensitivity, as higher yields on bonds can pressure valuations for high-dividend equities.
- Regulatory risk, including changes in allowed returns, environmental rules, and rate case outcomes in key jurisdictions.
- Capital intensity, with significant ongoing investment required in grid modernization, renewable generation, and reliability.
- Market volatility during episodes such as the 2018 risk-off environment and the 2020 pandemic-driven sell-off.
The historical return profile shown here underscores that even relatively defensive sectors such as electric utilities can deliver equity-like returns over time, provided that dividends are maintained and gradually increased, and that investors are willing to tolerate interim price drawdowns.
Looking Ahead: The Next 10 Years
On a total return basis, the past decade’s 181.58% gain in this AEP scenario offers a clear illustration of the potential benefit of a long-term, income-oriented strategy. The more challenging question for investors is how shares might perform over the next 10 years.
Future total returns will depend on a combination of factors, including:
- The trajectory of interest rates and inflation, which influence both utility valuations and financing costs.
- Regulatory and policy developments related to decarbonization, grid reliability, and infrastructure spending.
- AEP’s capital allocation decisions, including investment in transmission and renewable generation projects.
- The company’s ability to sustain and grow its dividend in line with earnings and cash flow.
Past performance does not guarantee future results, and investors should consider their own risk tolerance, time horizon, and diversification needs before making allocation decisions. Nonetheless, this 10-year case study illustrates how a methodical approach — buying a quality, dividend-paying utility and reinvesting income — can compound capital over a full market cycle.
Here’s one more investment quote before you go:
“The greater the passive income you can build, the freer you will become.” — Todd Fleming
