“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 Discover Financial Services (NYSE: DFS) back in 2014, bought the stock, ignored the market’s ups and downs, and simply held through to today.
| Start date: | 06/24/2014 |
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| End date: | 06/21/2019 | ||||
| Start price/share: | $61.56 | ||||
| End price/share: | $78.38 | ||||
| Starting shares: | 162.44 | ||||
| Ending shares: | 179.51 | ||||
| Dividends reinvested/share: | $6.32 | ||||
| Total return: | 40.70% | ||||
| Average annual return: | 7.08% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $14,072.75 | ||||
As shown above, the five year investment result worked out well, with an annualized rate of return of 7.08%. This would have turned a $10K investment made 5 years ago into $14,072.75 today (as of 06/21/2019). On a total return basis, that’s a result of 40.70% (something to think about: how might DFS shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Discover Financial Services paid investors a total of $6.32/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 1.6/share, we calculate that DFS has a current yield of approximately 2.04%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.6 against the original $61.56/share purchase price. This works out to a yield on cost of 3.31%.
Another great investment quote to think about:
“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
