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“I buy on the assumption that they could close the market the next day and not reopen it for five years.”

— Warren Buffett

The wisdom of Warren Buffett reflects a value-based philosophy about investing that says investors are buying shares in a business, and encourages strategic thinking about investment time horizon. Before placing a buy order for a stock, a great question we can ask is whether we would still be comfortable making the investment if we couldn’t sell it for many years?

A “buy-and-hold” approach may call for a time horizon that spans a long period of time — maybe even lasting for a five year holding period. Suppose such a “buy-and-hold” investor had looked into buying shares of Nike (NYSE: NKE) back in 2018. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:

Start date: 05/21/2018
$10,000

05/21/2018
  $17,494

05/18/2023
End date: 05/18/2023
Start price/share: $71.38
End price/share: $118.87
Starting shares: 140.10
Ending shares: 147.15
Dividends reinvested/share: $5.26
Total return: 74.92%
Average annual return: 11.85%
Starting investment: $10,000.00
Ending investment: $17,494.98

As we can see, the five year investment result worked out quite well, with an annualized rate of return of 11.85%. This would have turned a $10K investment made 5 years ago into $17,494.98 today (as of 05/18/2023). On a total return basis, that’s a result of 74.92% (something to think about: how might NKE shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]

Notice that Nike paid investors a total of $5.26/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 1.36/share, we calculate that NKE has a current yield of approximately 1.14%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.36 against the original $71.38/share purchase price. This works out to a yield on cost of 1.60%.

One more investment quote to leave you with:
“When you sell in desperation, you always sell cheap.” — Peter Lynch