“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
— Warren Buffett
The investment philosophy practiced by Warren Buffett calls for investors to take a long-term horizon when making an investment, such as a decade-long holding period (or even longer), and reconsider making the investment in the first place if unable to envision holding the stock for at least five years. Today, we look at how such a long-term strategy would have done for investors in The Gap Inc (NYSE: GPS) back in 2011, holding through to today.
| Start date: | 03/23/2011 |
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| End date: | 03/22/2021 | ||||
| Start price/share: | $22.02 | ||||
| End price/share: | $30.20 | ||||
| Starting shares: | 454.13 | ||||
| Ending shares: | 593.22 | ||||
| Dividends reinvested/share: | $7.24 | ||||
| Total return: | 79.15% | ||||
| Average annual return: | 6.00% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $17,914.20 | ||||
As shown above, the decade-long investment result worked out well, with an annualized rate of return of 6.00%. This would have turned a $10K investment made 10 years ago into $17,914.20 today (as of 03/22/2021). On a total return basis, that’s a result of 79.15% (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 $7.24/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 3.21%. 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 $22.02/share purchase price. This works out to a yield on cost of 14.58%.
Here’s one more great investment quote before you go:
“People who succeed in the stock market also accept periodic losses, setbacks, and unexpected occurrences. Calamitous drops do not scare them out of the game.” — Peter Lynch
