“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett
This inspiring quote from Warren Buffett teaches us the importance of considering our investment time horizon when approaching any given investment: Could we envision ourselves holding the stock we are considering for many years? Even a five year holding period potentially?
For “buy-and-hold” investors taking a long-term view, what’s important isn’t the short-term stock market fluctuations that will inevitably occur, but what happens over the long haul. Looking back 5 years to 2014, investors considering an investment into shares of Automatic Data Processing Inc. (NASD: ADP) may have been pondering this very question and thinking about their potential investment result over a full five year time horizon. Here’s how that would have worked out.
| Start date: | 10/28/2014 |
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| End date: | 10/25/2019 | ||||
| Start price/share: | $77.26 | ||||
| End price/share: | $161.96 | ||||
| Starting shares: | 129.43 | ||||
| Ending shares: | 144.68 | ||||
| Dividends reinvested/share: | $12.16 | ||||
| Total return: | 134.33% | ||||
| Average annual return: | 18.59% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $23,433.36 | ||||
As shown above, the five year investment result worked out exceptionally well, with an annualized rate of return of 18.59%. This would have turned a $10K investment made 5 years ago into $23,433.36 today (as of 10/25/2019). On a total return basis, that’s a result of 134.33% (something to think about: how might ADP shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Always an important consideration with a dividend-paying company is: should we reinvest our dividends?Over the past 5 years, Automatic Data Processing Inc. has paid $12.16/share in dividends. For the above analysis, we assume that the investor reinvests dividends into new shares of stock (for the above calculations, the reinvestment is performed using closing price on ex-div date for that dividend).
Based upon the most recent annualized dividend rate of 3.16/share, we calculate that ADP has a current yield of approximately 1.95%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 3.16 against the original $77.26/share purchase price. This works out to a yield on cost of 2.52%.
One more investment quote to leave you with:
“The function of economic forecasting is to make astrology look respectable.” — John Galbraith
