“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 2014, 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 2014 and held on.
| Start date: | 02/03/2014 |
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| End date: | 01/31/2024 | ||||
| Start price/share: | $52.21 | ||||
| End price/share: | $105.52 | ||||
| Starting shares: | 191.53 | ||||
| Ending shares: | 237.61 | ||||
| Dividends reinvested/share: | $16.28 | ||||
| Total return: | 150.73% | ||||
| Average annual return: | 9.63% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $25,071.76 | ||||
As we can see, the decade-long investment result worked out well, with an annualized rate of return of 9.63%. This would have turned a $10K investment made 10 years ago into $25,071.76 today (as of 01/31/2024). On a total return basis, that’s a result of 150.73% (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.]
Beyond share price change, another component of DFS’s total return these past 10 years has been the payment by Discover Financial Services of $16.28/share in dividends to shareholders. Automatic reinvestment of dividends can be a wonderful way to compound returns, and for the above calculations we presume that dividends are reinvested into additional shares of stock. (For the purpose of these calcuations, the closing price on ex-date is used).
Based upon the most recent annualized dividend rate of 2.8/share, we calculate that DFS has a current yield of approximately 2.65%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2.8 against the original $52.21/share purchase price. This works out to a yield on cost of 5.08%.
Another great investment quote to think about:
“All you need for a lifetime of successful investing is a few big winners, and the pluses from those will overwhelm the minuses from the stocks that don’t work out.” — Peter Lynch
