“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 decade-long period?
Today, let’s look backwards in time to 2012, 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 decade-long holding period.
| Start date: | 06/28/2012 |
|
|||
| End date: | 06/27/2022 | ||||
| Start price/share: | $9.21 | ||||
| End price/share: | $36.99 | ||||
| Starting shares: | 1,085.78 | ||||
| Ending shares: | 1,165.37 | ||||
| Dividends reinvested/share: | $2.99 | ||||
| Total return: | 331.07% | ||||
| Average annual return: | 15.73% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $43,115.49 | ||||
The above analysis shows the decade-long investment result worked out exceptionally well, with an annualized rate of return of 15.73%. This would have turned a $10K investment made 10 years ago into $43,115.49 today (as of 06/27/2022). On a total return basis, that’s a result of 331.07% (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 $2.99/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 1.95%. 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 $9.21/share purchase price. This works out to a yield on cost of 21.17%.
One more investment quote to leave you with:
“The function of economic forecasting is to make astrology look respectable.” — John Galbraith
