“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 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 ten year holding period. Suppose such a “buy-and-hold” investor had looked into buying shares of Discover Financial Services (NYSE: DFS) back in 2010. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
| Start date: | 05/05/2010 |
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| End date: | 05/04/2020 | ||||
| Start price/share: | $14.94 | ||||
| End price/share: | $41.37 | ||||
| Starting shares: | 669.34 | ||||
| Ending shares: | 788.53 | ||||
| Dividends reinvested/share: | $9.46 | ||||
| Total return: | 226.21% | ||||
| Average annual return: | 12.54% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $32,609.96 | ||||
As we can see, the ten year investment result worked out quite well, with an annualized rate of return of 12.54%. This would have turned a $10K investment made 10 years ago into $32,609.96 today (as of 05/04/2020). On a total return basis, that’s a result of 226.21% (something to think about: how might DFS shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Discover Financial Services paid investors a total of $9.46/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 1.76/share, we calculate that DFS has a current yield of approximately 4.25%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.76 against the original $14.94/share purchase price. This works out to a yield on cost of 28.45%.
More investment wisdom to ponder:
“We ignore outlooks and forecasts… we’re lousy at it and we admit it … everyone else is lousy too, but most people won’t admit it.” — Martin Whitman
