“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
— Warren Buffett
A key lesson we can learn from Warren Buffett, is about how to think about a potential stock investment in the context of a long-term time horizon. Every investor in a stock has a choice: bite our fingernails over the short-term ups and downs that are inevitable with the stock market, or, zero in on stocks we are comfortable to simply buy and hold for the long haul — maybe even a ten year holding period. Heck, investors can even choose to completely ignore the stock market’s short-run quotations and instead go into their initial investment planning to hold on for years and years regardless of the fluctuations in price that might occur next.
Today, we examine what would have happened over a ten year holding period, had you decided back in 2010 to buy shares of Southwest Airlines Co (NYSE: LUV) and simply hold through to today.
| Start date: | 04/13/2010 |
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| End date: | 04/09/2020 | ||||
| Start price/share: | $13.34 | ||||
| End price/share: | $36.47 | ||||
| Starting shares: | 749.63 | ||||
| Ending shares: | 808.67 | ||||
| Dividends reinvested/share: | $3.04 | ||||
| Total return: | 194.92% | ||||
| Average annual return: | 11.43% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $29,504.79 | ||||
As shown above, the ten year investment result worked out quite well, with an annualized rate of return of 11.43%. This would have turned a $10K investment made 10 years ago into $29,504.79 today (as of 04/09/2020). On a total return basis, that’s a result of 194.92% (something to think about: how might LUV shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Southwest Airlines Co paid investors a total of $3.04/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 .72/share, we calculate that LUV has a current yield of approximately 1.97%. 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 $13.34/share purchase price. This works out to a yield on cost of 14.77%.
One more investment quote 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
