“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
— Warren Buffett
Investors can learn a lot from Warren Buffett, whose above quote teaches the importance of thinking about investment time horizon, and asking ourselves before buying any given stock: can we envision holding onto it for years — even a decade-long holding period possibly?
Suppose a “buy-and-hold” investor was considering an investment into Southwest Airlines Co (NYSE: LUV) back in 2012: back then, such an investor may have been pondering this very same question. Had they answered “yes” to a full decade-long investment time horizon and then actually held for these past 10 years, here’s how that investment would have turned out.
| Start date: | 04/09/2012 |
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| End date: | 04/06/2022 | ||||
| Start price/share: | $8.22 | ||||
| End price/share: | $43.73 | ||||
| Starting shares: | 1,216.55 | ||||
| Ending shares: | 1,307.25 | ||||
| Dividends reinvested/share: | $3.00 | ||||
| Total return: | 471.66% | ||||
| Average annual return: | 19.05% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $57,159.25 | ||||
As shown above, the decade-long investment result worked out exceptionally well, with an annualized rate of return of 19.05%. This would have turned a $10K investment made 10 years ago into $57,159.25 today (as of 04/06/2022). On a total return basis, that’s a result of 471.66% (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 $3.00/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 1.65%. 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 $8.22/share purchase price. This works out to a yield on cost of 20.07%.
One more investment quote to leave you with:
“The best stock to buy is the one you already own.” — Peter Lynch
