“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 The Gap Inc (NYSE: GPS), by taking a look at the investment outcome over a decade-long holding period.
| Start date: | 04/13/2009 |
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| End date: | 04/11/2019 | ||||
| Start price/share: | $14.98 | ||||
| End price/share: | $25.47 | ||||
| Starting shares: | 667.56 | ||||
| Ending shares: | 864.19 | ||||
| Dividends reinvested/share: | $7.16 | ||||
| Total return: | 120.11% | ||||
| Average annual return: | 8.21% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $22,012.73 | ||||
As we can see, the decade-long investment result worked out well, with an annualized rate of return of 8.21%. This would have turned a $10K investment made 10 years ago into $22,012.73 today (as of 04/11/2019). On a total return basis, that’s a result of 120.11% (something to think about: how might GPS shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that The Gap Inc paid investors a total of $7.16/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 .97/share, we calculate that GPS has a current yield of approximately 3.81%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of .97 against the original $14.98/share purchase price. This works out to a yield on cost of 25.43%.
One more piece of investment wisdom to leave you with:
“If you have more than 120 or 130 I.Q. points, you can afford to give the rest away. You don’t need extraordinary intelligence to succeed as an investor.” — Warren Buffett
