“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett
The Warren Buffett investment philosophy calls for a long-term investment horizon, where a five year holding period, or even longer, would fit right into the strategy. How would such a strategy have worked out for an investment into Discover Financial Services (NYSE: DFS)? Today, we examine the outcome of a five year investment into the stock back in 2015.
| Start date: | 04/17/2015 |
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| End date: | 04/16/2020 | ||||
| Start price/share: | $59.08 | ||||
| End price/share: | $31.69 | ||||
| Starting shares: | 169.26 | ||||
| Ending shares: | 187.91 | ||||
| Dividends reinvested/share: | $6.92 | ||||
| Total return: | -40.45% | ||||
| Average annual return: | -9.84% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $5,955.88 | ||||
The above analysis shows the five year investment result worked out poorly, with an annualized rate of return of -9.84%. This would have turned a $10K investment made 5 years ago into $5,955.88 today (as of 04/16/2020). On a total return basis, that’s a result of -40.45% (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 $6.92/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 1.76/share, we calculate that DFS has a current yield of approximately 5.55%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.76 against the original $59.08/share purchase price. This works out to a yield on cost of 9.39%.
Another great investment quote to think about:
“October is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” — Mark Twain
