“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.
| Start date: | 02/18/2016 |
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| End date: | 02/17/2021 | ||||
| Start price/share: | $46.39 | ||||
| End price/share: | $91.70 | ||||
| Starting shares: | 215.56 | ||||
| Ending shares: | 241.43 | ||||
| Dividends reinvested/share: | $7.56 | ||||
| Total return: | 121.40% | ||||
| Average annual return: | 17.22% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $22,141.02 | ||||
As shown above, the five year investment result worked out exceptionally well, with an annualized rate of return of 17.22%. This would have turned a $10K investment made 5 years ago into $22,141.02 today (as of 02/17/2021). On a total return basis, that’s a result of 121.40% (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.]
Beyond share price change, another component of DFS’s total return these past 5 years has been the payment by Discover Financial Services of $7.56/share in dividends to shareholders. Automatic reinvestment of dividends can be a wonderful way to compound returns, and for the above calculations we presume that dividends are reinvested into additional shares of stock. (For the purpose of these calcuations, the closing price on ex-date is used).
Based upon the most recent annualized dividend rate of 1.76/share, we calculate that DFS has a current yield of approximately 1.92%. 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 $46.39/share purchase price. This works out to a yield on cost of 4.14%.
Another great investment quote to think about:
“In the long run, we are all dead.” — John Maynard Keynes
