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“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”

— Warren Buffett

The Warren Buffett investment philosophy calls for a long-term investment horizon, where a twenty year holding period, or even longer, would fit right into the strategy. How would such a strategy have worked out for an investment into The Gap Inc (NYSE: GPS)? Today, we examine the outcome of a twenty year investment into the stock back in 1999.

Start date: 11/19/1999
$10,000

11/19/1999
$6,756

11/18/2019
End date: 11/18/2019
Start price/share: $37.56
End price/share: $17.30
Starting shares: 266.22
Ending shares: 390.39
Dividends reinvested/share: $9.38
Total return: -32.46%
Average annual return: -1.94%
Starting investment: $10,000.00
Ending investment: $6,756.85

As shown above, the twenty year investment result worked out poorly, with an annualized rate of return of -1.94%. This would have turned a $10K investment made 20 years ago into $6,756.85 today (as of 11/18/2019). On a total return basis, that’s a result of -32.46% (something to think about: how might GPS shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]

Notice that The Gap Inc paid investors a total of $9.38/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 .97/share, we calculate that GPS has a current yield of approximately 5.61%. 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 $37.56/share purchase price. This works out to a yield on cost of 14.94%.

More investment wisdom to ponder:
“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