“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”
— Warren Buffett
Such a great quote from Warren Buffett, highlighting the importance of investment time horizon when considering making an investment. In the short run, who knows what the stock market will do? A week or two after buying any given stock, could the entire stock market fall out of bed? Quite possibly! Should that happen, how would you react? It is an excellent question to think about before hitting the buy button.
For investors who take a multi-year time horizon, the important thing is not what happens in the next week or two, but what the result will be over the long haul. Today, we look at the result investors of the year 1999 experienced, who considered an investment in shares of Southwest Airlines Co (NYSE: LUV) and decided upon a two-decade investment time horizon.
| Start date: | 10/11/1999 |
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| End date: | 10/10/2019 | ||||
| Start price/share: | $11.75 | ||||
| End price/share: | $53.67 | ||||
| Starting shares: | 851.06 | ||||
| Ending shares: | 925.14 | ||||
| Dividends reinvested/share: | $2.88 | ||||
| Total return: | 396.52% | ||||
| Average annual return: | 8.34% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $49,677.29 | ||||
The above analysis shows the two-decade investment result worked out well, with an annualized rate of return of 8.34%. This would have turned a $10K investment made 20 years ago into $49,677.29 today (as of 10/10/2019). On a total return basis, that’s a result of 396.52% (something to think about: how might LUV shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Always an important consideration with a dividend-paying company is: should we reinvest our dividends?Over the past 20 years, Southwest Airlines Co has paid $2.88/share in dividends. For the above analysis, we assume that the investor reinvests dividends into new shares of stock (for the above calculations, the reinvestment is performed using closing price on ex-div date for that dividend).
Based upon the most recent annualized dividend rate of .72/share, we calculate that LUV has a current yield of approximately 1.34%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of .72 against the original $11.75/share purchase price. This works out to a yield on cost of 11.40%.
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
