“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett
One of the most important things investors can learn from Warren Buffett, is about how they approach their time horizon for an investment into a stock under consideration. Because immediately after buying shares of a given stock, investors will then be able to check on the day-to-day (and even minute-by-minute) market value. Some days the stock market will be up, other days down. These daily fluctuations can often distract from the long-term view. Today, we look at the result of a five year holding period for an investor who was considering Electronic Arts, Inc. (NASD: EA) back in 2016, bought the stock, ignored the market’s ups and downs, and simply held through to today.
| Start date: | 08/03/2016 |
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| End date: | 08/02/2021 | ||||
| Start price/share: | $78.63 | ||||
| End price/share: | $144.11 | ||||
| Starting shares: | 127.18 | ||||
| Ending shares: | 127.66 | ||||
| Dividends reinvested/share: | $0.51 | ||||
| Total return: | 83.97% | ||||
| Average annual return: | 12.97% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $18,399.91 | ||||
As shown above, the five year investment result worked out quite well, with an annualized rate of return of 12.97%. This would have turned a $10K investment made 5 years ago into $18,399.91 today (as of 08/02/2021). On a total return basis, that’s a result of 83.97% (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 $0.51/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 0.47%. 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 $78.63/share purchase price. This works out to a yield on cost of 0.60%.
One more piece of investment wisdom to leave you with:
“The most important three words in investing is: “I don’t know.†If someone doesn’t say that to you then they are lying.” — James Altucher
