“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
— Warren Buffett
The wisdom of Warren Buffett reflects a value-based philosophy about investing that says investors are buying shares in a business, and encourages strategic thinking about investment time horizon. Before placing a buy order for a stock, a great question we can ask is whether we would still be comfortable making the investment if we couldn’t sell it for many years?
A “buy-and-hold” approach may call for a time horizon that spans a long period of time — maybe even lasting for a ten year holding period. Suppose such a “buy-and-hold” investor had looked into buying shares of Discover Financial Services (NYSE: DFS) back in 2012. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
|Average annual return:||11.90%|
As we can see, the ten year investment result worked out quite well, with an annualized rate of return of 11.90%. This would have turned a $10K investment made 10 years ago into $30,791.77 today (as of 10/31/2022). On a total return basis, that’s a result of 207.95% (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 $13.72/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 2.4/share, we calculate that DFS has a current yield of approximately 2.30%. 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 $41.32/share purchase price. This works out to a yield on cost of 5.57%.
More investment wisdom to ponder:
“In the long run, it’s not just how much money you make that will determine your future prosperity. It’s how much of that money you put to work by saving it and investing it.” — Peter Lynch