“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett
The Warren Buffett investment philosophy calls for a long-term investment horizon, where a five 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 five year investment into the stock back in 2015.
| Start date: | 11/05/2015 |
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| End date: | 11/04/2020 | ||||
| Start price/share: | $28.37 | ||||
| End price/share: | $20.93 | ||||
| Starting shares: | 352.49 | ||||
| Ending shares: | 417.05 | ||||
| Dividends reinvested/share: | $4.01 | ||||
| Total return: | -12.71% | ||||
| Average annual return: | -2.68% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $8,729.28 | ||||
As shown above, the five year investment result worked out poorly, with an annualized rate of return of -2.68%. This would have turned a $10K investment made 5 years ago into $8,729.28 today (as of 11/04/2020). On a total return basis, that’s a result of -12.71% (something to think about: how might GPS shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that The Gap Inc paid investors a total of $4.01/share in dividends over the 5 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 4.63%. 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 $28.37/share purchase price. This works out to a yield on cost of 16.32%.
Another great investment quote to think about:
“Finding the best person or the best organization to invest your money is one of the most important financial decisions you’ll ever make.” — Bill Gross
