“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett
Such a great quote from Warren Buffett, highlighting the importance of investment time horizon when considering making an investment. In the short run, who knows what the stock market will do? A week or two after buying any given stock, could the entire stock market fall out of bed? Quite possibly! Should that happen, how would you react? It is an excellent question to think about before hitting the buy button.
For investors who take a multi-year time horizon, the important thing is not what happens in the next week or two, but what the result will be over the long haul. Today, we look at the result investors of the year 2016 experienced, who considered an investment in shares of Discover Financial Services (NYSE: DFS) and decided upon a five year investment time horizon.
| Start date: | 11/01/2016 |
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| End date: | 10/29/2021 | ||||
| Start price/share: | $56.06 | ||||
| End price/share: | $113.32 | ||||
| Starting shares: | 178.38 | ||||
| Ending shares: | 199.25 | ||||
| Dividends reinvested/share: | $7.92 | ||||
| Total return: | 125.79% | ||||
| Average annual return: | 17.71% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $22,577.65 | ||||
As we can see, the five year investment result worked out exceptionally well, with an annualized rate of return of 17.71%. This would have turned a $10K investment made 5 years ago into $22,577.65 today (as of 10/29/2021). On a total return basis, that’s a result of 125.79% (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.]
Notice that Discover Financial Services paid investors a total of $7.92/share in dividends over the 5 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 2/share, we calculate that DFS has a current yield of approximately 1.77%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2 against the original $56.06/share purchase price. This works out to a yield on cost of 3.16%.
More investment wisdom to ponder:
“The policy of being too cautious is the greatest risk of all.” — Jawaharlal Nehru
