“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 two-decade holding period, or even longer, would fit right into the strategy. How would such a strategy have worked out for an investment into Southwest Airlines Co (NYSE: LUV)? Today, we examine the outcome of a two-decade investment into the stock back in 2000.
| Start date: | 03/20/2000 |
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| End date: | 03/19/2020 | ||||
| Start price/share: | $13.25 | ||||
| End price/share: | $30.86 | ||||
| Starting shares: | 754.72 | ||||
| Ending shares: | 825.81 | ||||
| Dividends reinvested/share: | $3.23 | ||||
| Total return: | 154.84% | ||||
| Average annual return: | 4.79% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $25,501.39 | ||||
As we can see, the two-decade investment result worked out as follows, with an annualized rate of return of 4.79%. This would have turned a $10K investment made 20 years ago into $25,501.39 today (as of 03/19/2020). On a total return basis, that’s a result of 154.84% (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.]
Notice that Southwest Airlines Co paid investors a total of $3.23/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 .72/share, we calculate that LUV has a current yield of approximately 2.33%. 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 $13.25/share purchase price. This works out to a yield on cost of 17.58%.
One more piece of investment wisdom to leave you with:
“A risk-reward ratio is important, but so is an aggravation-satisfaction ratio.” — Muriel Siebert
