“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 2016, 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 2016 and held on.
| Start date: | 10/21/2016 |
|
|||
| End date: | 10/20/2021 | ||||
| Start price/share: | $82.87 | ||||
| End price/share: | $139.20 | ||||
| Starting shares: | 120.67 | ||||
| Ending shares: | 121.27 | ||||
| Dividends reinvested/share: | $0.68 | ||||
| Total return: | 68.80% | ||||
| Average annual return: | 11.04% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $16,880.96 | ||||
As shown above, the five year investment result worked out quite well, with an annualized rate of return of 11.04%. This would have turned a $10K investment made 5 years ago into $16,880.96 today (as of 10/20/2021). On a total return basis, that’s a result of 68.80% (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.]
Many investors out there refuse to own any stock that lacks a dividend; in the case of Electronic Arts, Inc., investors have received $0.68/share in dividends these past 5 years examined in the exercise above. This means total return was driven not just by share price, but also by the dividends received (and what the investor did with those dividends). For this exercise, what we’ve done with the dividends is to assume they are reinvestted — i.e. used to purchase additional shares (the calculations use closing price on ex-date).
Based upon the most recent annualized dividend rate of .68/share, we calculate that EA has a current yield of approximately 0.49%. 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 $82.87/share purchase price. This works out to a yield on cost of 0.59%.
One more piece of investment wisdom to leave you with:
“The underlying principles of sound investment should not alter from decade to decade, but the application of these principles must be adapted to significant changes in the financial mechanisms and climate.” — Benjamin Graham
