“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
— Warren Buffett
Investors can learn a lot from Warren Buffett, whose above quote teaches the importance of thinking about investment time horizon, and asking ourselves before buying any given stock: can we envision holding onto it for years — even a two-decade holding period possibly?
Suppose a “buy-and-hold” investor was considering an investment into Alaska Air Group, Inc. (NYSE: ALK) back in 1999: back then, such an investor may have been pondering this very same question. Had they answered “yes” to a full two-decade investment time horizon and then actually held for these past 20 years, here’s how that investment would have turned out.
| Start date: | 03/01/1999 |
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| End date: | 02/28/2019 | ||||
| Start price/share: | $12.71 | ||||
| End price/share: | $61.70 | ||||
| Starting shares: | 786.78 | ||||
| Ending shares: | 855.48 | ||||
| Dividends reinvested/share: | $5.43 | ||||
| Total return: | 427.83% | ||||
| Average annual return: | 8.67% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $52,794.55 | ||||
As we can see, the two-decade investment result worked out well, with an annualized rate of return of 8.67%. This would have turned a $10K investment made 20 years ago into $52,794.55 today (as of 02/28/2019). On a total return basis, that’s a result of 427.83% (something to think about: how might ALK shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Alaska Air Group, Inc. paid investors a total of $5.43/share in dividends over the 20 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 1.4/share, we calculate that ALK has a current yield of approximately 2.27%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.4 against the original $12.71/share purchase price. This works out to a yield on cost of 17.86%.
Another great investment quote to think about:
“Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” — Albert Einstein
