“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
— Warren Buffett
The Warren Buffett investment philosophy calls for a long-term investment horizon, where a ten 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 ten year investment into the stock back in 2010.
| Start date: | 05/26/2010 |
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| End date: | 05/22/2020 | ||||
| Start price/share: | $21.22 | ||||
| End price/share: | $8.21 | ||||
| Starting shares: | 471.25 | ||||
| Ending shares: | 624.94 | ||||
| Dividends reinvested/share: | $7.54 | ||||
| Total return: | -48.69% | ||||
| Average annual return: | -6.46% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $5,129.24 | ||||
As shown above, the ten year investment result worked out poorly, with an annualized rate of return of -6.46%. This would have turned a $10K investment made 10 years ago into $5,129.24 today (as of 05/22/2020). On a total return basis, that’s a result of -48.69% (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 $7.54/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 11.81%. 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 $21.22/share purchase price. This works out to a yield on cost of 55.66%.
One more piece of investment wisdom to leave you with:
“While some might mistakenly consider value investing a mechanical tool for identifying bargains, it is actually a comprehensive investment philosophy that emphasizes the need to perform in-depth fundamental analysis, pursue long-term investment results, limit risk, and resist crowd psychology.” — Seth Klarman
