“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
— Warren Buffett
The above quote from Warren Buffett is timeless, and brings into focus the choice about time horizon that any investor should think about before buying a stock they are considering. Behind every stock is an actual business; what will that business look like over a decade-long period?
Today, let’s look backwards in time to 2010, and take a look at what happened to investors who asked that very question about Discover Financial Services (NYSE: DFS), by taking a look at the investment outcome over a decade-long holding period.
| Start date: | 06/15/2010 |
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| End date: | 06/12/2020 | ||||
| Start price/share: | $13.92 | ||||
| End price/share: | $52.99 | ||||
| Starting shares: | 718.39 | ||||
| Ending shares: | 855.39 | ||||
| Dividends reinvested/share: | $9.90 | ||||
| Total return: | 353.27% | ||||
| Average annual return: | 16.31% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $45,307.55 | ||||
As shown above, the decade-long investment result worked out exceptionally well, with an annualized rate of return of 16.31%. This would have turned a $10K investment made 10 years ago into $45,307.55 today (as of 06/12/2020). On a total return basis, that’s a result of 353.27% (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 $9.90/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 3.32%. 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 $13.92/share purchase price. This works out to a yield on cost of 23.85%.
More investment wisdom to ponder:
“Smart investing doesn’t consist of buying good assets but of buying assets well. This is a very, very important distinction that very, very few people understand.” — Howard Marks
