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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 Electronic Arts, Inc. (NASD: EA) back in 2017. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:

Start date: 04/17/2017
$10,000

04/17/2017
$13,965

04/13/2022
End date: 04/13/2022
Start price/share: $89.21
End price/share: $123.62
Starting shares: 112.10
Ending shares: 112.96
Dividends reinvested/share: $1.02
Total return: 39.64%
Average annual return: 6.92%
Starting investment: $10,000.00
Ending investment: $13,965.48

As we can see, the five year investment result worked out well, with an annualized rate of return of 6.92%. This would have turned a $10K investment made 5 years ago into $13,965.48 today (as of 04/13/2022). On a total return basis, that’s a result of 39.64% (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 $1.02/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 0.55%. 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 $89.21/share purchase price. This works out to a yield on cost of 0.62%.

One more investment quote to leave you with:
“The stock market is a device to transfer money from the impatient to the patient.” — Warren Buffett