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“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


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