“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett
A critical pearl of wisdom from Warren Buffett teaches us that with any potential stock investment we may make, as soon as our buy order is filled we will have a choice: to remain a co-owner of that company for the long haul, or to react to the inevitable short-term ups and downs that the stock market is famous for (sometimes sharp ups and downs).
The reality of this choice forces us to challenge our confidence in any given company we might invest into, and keep our eyes on the long-term time horizon. The market may go up and down the interim, but over a five year holding period, will the investment succeed?
Back in 2015, investors may have been asking themselves that very question about Electronic Arts, Inc. (NASD: EA). Let’s examine what would have happened over a five year holding period, had you invested in EA shares back in 2015 and held on.
|Average annual return:||14.95%|
As shown above, the five year investment result worked out quite well, with an annualized rate of return of 14.95%. This would have turned a $10K investment made 5 years ago into $20,077.55 today (as of 12/10/2020). On a total return basis, that’s a result of 100.77% (something to think about: how might EA shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Electronic Arts, Inc. paid investors a total of $0.17/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 .68/share, we calculate that EA has a current yield of approximately 0.50%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of .68 against the original $67.17/share purchase price. This works out to a yield on cost of 0.74%.
One more piece of investment wisdom to leave you with:
“Confronted with a challenge to distill the secret of sound investment into three words, we venture the motto, Margin of Safety.” — Benjamin Graham