“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett
Such a great quote from Warren Buffett, highlighting the importance of investment time horizon when considering making an investment. In the short run, who knows what the stock market will do? A week or two after buying any given stock, could the entire stock market fall out of bed? Quite possibly! Should that happen, how would you react? It is an excellent question to think about before hitting the buy button.
For investors who take a multi-year time horizon, the important thing is not what happens in the next week or two, but what the result will be over the long haul. Today, we look at the result investors of the year 2015 experienced, who considered an investment in shares of Automatic Data Processing Inc. (NASD: ADP) and decided upon a five year investment time horizon.
|Average annual return:||13.43%|
The above analysis shows the five year investment result worked out quite well, with an annualized rate of return of 13.43%. This would have turned a $10K investment made 5 years ago into $18,784.07 today (as of 08/05/2020). On a total return basis, that’s a result of 87.86% (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.]
Dividends are always an important investment factor to consider, and Automatic Data Processing Inc. has paid $13.42/share in dividends to shareholders over the past 5 years we looked at above. Many an investor will only invest in stocks that pay dividends, so this component of total return is always an important consideration. Automated reinvestment of dividends into additional shares of stock can be a great way for an investor to compound their returns. The above calculations are done with the assuption that dividends received over time are reinvested (the calcuations use the closing price on ex-date).
Based upon the most recent annualized dividend rate of 3.64/share, we calculate that ADP has a current yield of approximately 2.70%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 3.64 against the original $80.30/share purchase price. This works out to a yield on cost of 3.36%.
One more investment quote to leave you with:
“You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.” — Peter Lynch