“I buy on the assumption that they could close the market the next day and not reopen it for five 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 five year period?
Today, let’s look backwards in time to 2016, 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 five year holding period.
|Average annual return:||16.16%|
As shown above, the five year investment result worked out exceptionally well, with an annualized rate of return of 16.16%. This would have turned a $10K investment made 5 years ago into $21,157.35 today (as of 01/06/2021). On a total return basis, that’s a result of 111.60% (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.]
Many investors out there refuse to own any stock that lacks a dividend; in the case of Discover Financial Services, investors have received $7.40/share in dividends these past 5 years examined in the exercise above. This means total return was driven not just by share price, but also by the dividends received (and what the investor did with those dividends). For this exercise, what we’ve done with the dividends is to assume they are reinvestted — i.e. used to purchase additional shares (the calculations use closing price on ex-date).
Based upon the most recent annualized dividend rate of 1.76/share, we calculate that DFS has a current yield of approximately 1.84%. 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 $50.60/share purchase price. This works out to a yield on cost of 3.64%.
More investment wisdom to ponder:
“I made my money by selling too soon.” — Bernard Baruch