“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
— Warren Buffett
A critical pearl of wisdom from Warren Buffett teaches us that with any potential stock investment we may make, as soon as our buy order is filled we will have a choice: to remain a co-owner of that company for the long haul, or to react to the inevitable short-term ups and downs that the stock market is famous for (sometimes sharp ups and downs).
The reality of this choice forces us to challenge our confidence in any given company we might invest into, and keep our eyes on the long-term time horizon. The market may go up and down the interim, but over a decade-long holding period, will the investment succeed?
Back in 2011, investors may have been asking themselves that very question about Discover Financial Services (NYSE: DFS). Let’s examine what would have happened over a decade-long holding period, had you invested in DFS shares back in 2011 and held on.
|Average annual return:||18.20%|
The above analysis shows the decade-long investment result worked out exceptionally well, with an annualized rate of return of 18.20%. This would have turned a $10K investment made 10 years ago into $53,232.24 today (as of 03/05/2021). On a total return basis, that’s a result of 432.25% (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 $11.16/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 1.80%. 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 $22.27/share purchase price. This works out to a yield on cost of 8.08%.
One more piece of investment wisdom to leave you with:
“The stock market is filled with individuals who know the price of everything, but the value of nothing.” — Phillip Fisher