“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 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 ten year period?
Today, let’s look backwards in time to 2011, and take a look at what happened to investors who asked that very question about Southwest Airlines Co (NYSE: LUV), by taking a look at the investment outcome over a ten year holding period.
| Start date: | 11/14/2011 |
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| End date: | 11/11/2021 | ||||
| Start price/share: | $8.19 | ||||
| End price/share: | $49.08 | ||||
| Starting shares: | 1,221.00 | ||||
| Ending shares: | 1,313.54 | ||||
| Dividends reinvested/share: | $3.01 | ||||
| Total return: | 544.68% | ||||
| Average annual return: | 20.49% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $64,492.62 | ||||
As we can see, the ten year investment result worked out exceptionally well, with an annualized rate of return of 20.49%. This would have turned a $10K investment made 10 years ago into $64,492.62 today (as of 11/11/2021). On a total return basis, that’s a result of 544.68% (something to think about: how might LUV shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Southwest Airlines Co paid investors a total of $3.01/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 .72/share, we calculate that LUV has a current yield of approximately 1.47%. 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 $8.19/share purchase price. This works out to a yield on cost of 17.95%.
Another great investment quote to think about:
“You’ve got to be careful if you don’t know where you’re going, ’cause you might not get there.” — Yogi Berra
