“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
— Warren Buffett
Investors can learn a lot from Warren Buffett, whose above quote teaches the importance of thinking about investment time horizon, and asking ourselves before buying any given stock: can we envision holding onto it for years — even a decade-long holding period possibly?
Suppose a “buy-and-hold” investor was considering an investment into Electronic Arts, Inc. (NASD: EA) back in 2014: back then, such an investor may have been pondering this very same question. Had they answered “yes” to a full decade-long investment time horizon and then actually held for these past 10 years, here’s how that investment would have turned out.
| Start date: | 07/17/2014 |
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| End date: | 07/16/2024 | ||||
| Start price/share: | $37.06 | ||||
| End price/share: | $146.67 | ||||
| Starting shares: | 269.83 | ||||
| Ending shares: | 275.55 | ||||
| Dividends reinvested/share: | $2.73 | ||||
| Total return: | 304.15% | ||||
| Average annual return: | 14.98% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $40,416.18 | ||||
As we can see, the decade-long investment result worked out quite well, with an annualized rate of return of 14.98%. This would have turned a $10K investment made 10 years ago into $40,416.18 today (as of 07/16/2024). On a total return basis, that’s a result of 304.15% (something to think about: how might EA shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Electronic Arts, Inc. paid investors a total of $2.73/share in dividends over the 10 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 .76/share, we calculate that EA has a current yield of approximately 0.52%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of .76 against the original $37.06/share purchase price. This works out to a yield on cost of 1.40%.
One more investment quote to leave you with:
“Investing is the intersection of economics and psychology.” — Seth Klarman
