“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 Southwest Airlines Co (NYSE: LUV)? Today, we examine the outcome of a five year investment into the stock back in 2016.
| Start date: | 10/27/2016 |
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| End date: | 10/26/2021 | ||||
| Start price/share: | $39.24 | ||||
| End price/share: | $47.59 | ||||
| Starting shares: | 254.84 | ||||
| Ending shares: | 264.90 | ||||
| Dividends reinvested/share: | $2.06 | ||||
| Total return: | 26.07% | ||||
| Average annual return: | 4.74% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $12,605.58 | ||||
As we can see, the five year investment result worked out as follows, with an annualized rate of return of 4.74%. This would have turned a $10K investment made 5 years ago into $12,605.58 today (as of 10/26/2021). On a total return basis, that’s a result of 26.07% (something to think about: how might LUV shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Southwest Airlines Co paid investors a total of $2.06/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 .72/share, we calculate that LUV has a current yield of approximately 1.51%. 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 $39.24/share purchase price. This works out to a yield on cost of 3.85%.
More investment wisdom to ponder:
“Value investing is at its core the marriage of a contrarian streak and a calculator.” — Seth Klarman
