“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
— Warren Buffett
The above quote from Warren Buffett is timeless, and brings into focus the choice about time horizon that any investor should think about before buying a stock they are considering. Behind every stock is an actual business; what will that business look like over a two-decade period?
Today, let’s look backwards in time to 2001, and take a look at what happened to investors who asked that very question about Automatic Data Processing Inc. (NASD: ADP), by taking a look at the investment outcome over a two-decade holding period.
| Start date: | 09/24/2001 |
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| End date: | 09/21/2021 | ||||
| Start price/share: | $35.71 | ||||
| End price/share: | $197.05 | ||||
| Starting shares: | 280.03 | ||||
| Ending shares: | 437.47 | ||||
| Dividends reinvested/share: | $31.79 | ||||
| Total return: | 762.03% | ||||
| Average annual return: | 11.37% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $86,222.51 | ||||
The above analysis shows the two-decade investment result worked out quite well, with an annualized rate of return of 11.37%. This would have turned a $10K investment made 20 years ago into $86,222.51 today (as of 09/21/2021). On a total return basis, that’s a result of 762.03% (something to think about: how might ADP shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Automatic Data Processing Inc. paid investors a total of $31.79/share in dividends over the 20 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 3.72/share, we calculate that ADP has a current yield of approximately 1.89%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 3.72 against the original $35.71/share purchase price. This works out to a yield on cost of 5.29%.
One more investment quote to leave you with:
“Spend each day trying to be a little wiser than you were when you woke up.” — Charlie Munger
