“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett
The above quote from Warren Buffett is timeless, and brings into focus the choice about time horizon that any investor should think about before buying a stock they are considering. Behind every stock is an actual business; what will that business look like over a five year period?
Today, let’s look backwards in time to 2016, and take a look at what happened to investors who asked that very question about The Gap Inc (NYSE: GPS), by taking a look at the investment outcome over a five year holding period.
| Start date: | 07/18/2016 |
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| End date: | 07/15/2021 | ||||
| Start price/share: | $23.88 | ||||
| End price/share: | $29.72 | ||||
| Starting shares: | 418.76 | ||||
| Ending shares: | 487.67 | ||||
| Dividends reinvested/share: | $3.69 | ||||
| Total return: | 44.94% | ||||
| Average annual return: | 7.71% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $14,491.17 | ||||
As we can see, the five year investment result worked out well, with an annualized rate of return of 7.71%. This would have turned a $10K investment made 5 years ago into $14,491.17 today (as of 07/15/2021). On a total return basis, that’s a result of 44.94% (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.]
Many investors out there refuse to own any stock that lacks a dividend; in the case of The Gap Inc, investors have received $3.69/share in dividends these past 5 years examined in the exercise above. This means total return was driven not just by share price, but also by the dividends received (and what the investor did with those dividends). For this exercise, what we’ve done with the dividends is to assume they are reinvestted — i.e. used to purchase additional shares (the calculations use closing price on ex-date).
Based upon the most recent annualized dividend rate of .48/share, we calculate that GPS has a current yield of approximately 1.62%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of .48 against the original $23.88/share purchase price. This works out to a yield on cost of 6.78%.
More investment wisdom to ponder:
“It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.” — George Soros
