“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett
One of the most important things investors can learn from Warren Buffett, is about how they approach their time horizon for an investment into a stock under consideration. Because immediately after buying shares of a given stock, investors will then be able to check on the day-to-day (and even minute-by-minute) market value. Some days the stock market will be up, other days down. These daily fluctuations can often distract from the long-term view. Today, we look at the result of a five year holding period for an investor who was considering Discover Financial Services (NYSE: DFS) back in 2018, bought the stock, ignored the market’s ups and downs, and simply held through to today.
| Start date: | 03/20/2018 |
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| End date: | 03/17/2023 | ||||
| Start price/share: | $75.36 | ||||
| End price/share: | $92.24 | ||||
| Starting shares: | 132.70 | ||||
| Ending shares: | 148.24 | ||||
| Dividends reinvested/share: | $9.37 | ||||
| Total return: | 36.73% | ||||
| Average annual return: | 6.46% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $13,670.47 | ||||
The above analysis shows the five year investment result worked out well, with an annualized rate of return of 6.46%. This would have turned a $10K investment made 5 years ago into $13,670.47 today (as of 03/17/2023). On a total return basis, that’s a result of 36.73% (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 $9.37/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 2.4/share, we calculate that DFS has a current yield of approximately 2.60%. 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 $75.36/share purchase price. This works out to a yield on cost of 3.45%.
Another great investment quote to think about:
“Never test the depth of a river with both feet.” — Warren Buffett
