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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 Ford Motor Co. (NYSE: F) 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: 12/27/2018
$10,000

12/27/2018
  $19,714

12/26/2023
End date: 12/26/2023
Start price/share: $7.85
End price/share: $12.45
Starting shares: 1,273.89
Ending shares: 1,583.30
Dividends reinvested/share: $2.60
Total return: 97.12%
Average annual return: 14.54%
Starting investment: $10,000.00
Ending investment: $19,714.51

The above analysis shows the five year investment result worked out quite well, with an annualized rate of return of 14.54%. This would have turned a $10K investment made 5 years ago into $19,714.51 today (as of 12/26/2023). On a total return basis, that’s a result of 97.12% (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 $2.60/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 4.82%. 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 $7.85/share purchase price. This works out to a yield on cost of 61.40%.

More investment wisdom to ponder:
“Only when the tide goes out do you discover who’s been swimming naked.” — Warren Buffett