“I buy on the assumption that they could close the market the next day and not reopen it for five 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 five year period?
Today, let’s look backwards in time to 2015, and take a look at what happened to investors who asked that very question about eBay Inc. (NASD: EBAY), by taking a look at the investment outcome over a five year holding period.
| Start date: | 03/11/2015 |
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| End date: | 03/10/2020 | ||||
| Start price/share: | $25.12 | ||||
| End price/share: | $36.04 | ||||
| Starting shares: | 398.09 | ||||
| Ending shares: | 405.97 | ||||
| Dividends reinvested/share: | $0.72 | ||||
| Total return: | 46.31% | ||||
| Average annual return: | 7.90% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $14,628.43 | ||||
The above analysis shows the five year investment result worked out well, with an annualized rate of return of 7.90%. This would have turned a $10K investment made 5 years ago into $14,628.43 today (as of 03/10/2020). On a total return basis, that’s a result of 46.31% (something to think about: how might EBAY shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that eBay Inc. paid investors a total of $0.72/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 .64/share, we calculate that EBAY has a current yield of approximately 1.78%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of .64 against the original $25.12/share purchase price. This works out to a yield on cost of 7.09%.
Another great investment quote to think about:
“Successful investing is anticipating the anticipations of others.” — John Maynard Keynes
