“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
— 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 twenty year period?
Today, let’s look backwards in time to 2002, 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 twenty year holding period.
| Start date: | 04/25/2002 |
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| End date: | 04/22/2022 | ||||
| Start price/share: | $18.39 | ||||
| End price/share: | $46.85 | ||||
| Starting shares: | 543.77 | ||||
| Ending shares: | 593.84 | ||||
| Dividends reinvested/share: | $3.20 | ||||
| Total return: | 178.21% | ||||
| Average annual return: | 5.25% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $27,833.25 | ||||
The above analysis shows the twenty year investment result worked out well, with an annualized rate of return of 5.25%. This would have turned a $10K investment made 20 years ago into $27,833.25 today (as of 04/22/2022). On a total return basis, that’s a result of 178.21% (something to think about: how might LUV shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Southwest Airlines Co paid investors a total of $3.20/share in dividends over the 20 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 1.54%. 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 $18.39/share purchase price. This works out to a yield on cost of 8.37%.
More investment wisdom to ponder:
“If you have trouble imagining a 20% loss in the stock market, you shouldn’t be in stocks.” — John Bogle
