“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett
This inspiring quote from Warren Buffett teaches us the importance of considering our investment time horizon when approaching any given investment: Could we envision ourselves holding the stock we are considering for many years? Even a five year holding period potentially?
For “buy-and-hold” investors taking a long-term view, what’s important isn’t the short-term stock market fluctuations that will inevitably occur, but what happens over the long haul. Looking back 5 years to 2016, investors considering an investment into shares of Ford Motor Co. (NYSE: F) may have been pondering this very question and thinking about their potential investment result over a full five year time horizon. Here’s how that would have worked out.
| Start date: | 09/23/2016 |
|
|||
| End date: | 09/22/2021 | ||||
| Start price/share: | $12.17 | ||||
| End price/share: | $13.23 | ||||
| Starting shares: | 821.69 | ||||
| Ending shares: | 1,021.96 | ||||
| Dividends reinvested/share: | $2.28 | ||||
| Total return: | 35.21% | ||||
| Average annual return: | 6.22% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $13,521.71 | ||||
The above analysis shows the five year investment result worked out well, with an annualized rate of return of 6.22%. This would have turned a $10K investment made 5 years ago into $13,521.71 today (as of 09/22/2021). On a total return basis, that’s a result of 35.21% (something to think about: how might F shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Ford Motor Co. paid investors a total of $2.28/share in dividends over the 5 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 .6/share, we calculate that F has a current yield of approximately 4.54%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of .6 against the original $12.17/share purchase price. This works out to a yield on cost of 37.30%.
More investment wisdom to ponder:
“The ideal business is one that earns very high returns on capital and that keeps using lots of capital at those high returns. That becomes a compounding machine.” — Warren Buffett
