“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett
Investors can learn a lot from Warren Buffett, whose above quote teaches the importance of thinking about investment time horizon, and asking ourselves before buying any given stock: can we envision holding onto it for years — even a five year holding period possibly?
Suppose a “buy-and-hold” investor was considering an investment into Discover Financial Services (NYSE: DFS) back in 2017: back then, such an investor may have been pondering this very same question. Had they answered “yes” to a full five year investment time horizon and then actually held for these past 5 years, here’s how that investment would have turned out.
|Average annual return:||12.67%|
As shown above, the five year investment result worked out quite well, with an annualized rate of return of 12.67%. This would have turned a $10K investment made 5 years ago into $18,156.89 today (as of 07/13/2022). On a total return basis, that’s a result of 81.54% (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.]
Dividends are always an important investment factor to consider, and Discover Financial Services has paid $8.62/share in dividends to shareholders over the past 5 years we looked at above. Many an investor will only invest in stocks that pay dividends, so this component of total return is always an important consideration. Automated reinvestment of dividends into additional shares of stock can be a great way for an investor to compound their returns. The above calculations are done with the assuption that dividends received over time are reinvested (the calcuations use the closing price on ex-date).
Based upon the most recent annualized dividend rate of 2.4/share, we calculate that DFS has a current yield of approximately 2.41%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2.4 against the original $61.26/share purchase price. This works out to a yield on cost of 3.93%.
More investment wisdom to ponder:
“Although it’s easy to forget sometimes, a share is not a lottery ticketâ€¦ it’s part-ownership of a business.” — Peter Lynch