“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett
Investors can learn a lot from Warren Buffett, whose above quote teaches the importance of thinking about investment time horizon, and asking ourselves before buying any given stock: can we envision holding onto it for years — even a five year holding period possibly?
Suppose a “buy-and-hold” investor was considering an investment into Automatic Data Processing Inc. (NASD: ADP) back in 2016: back then, such an investor may have been pondering this very same question. Had they answered “yes” to a full five year investment time horizon and then actually held for these past 5 years, here’s how that investment would have turned out.
| Start date: | 10/24/2016 |
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| End date: | 10/21/2021 | ||||
| Start price/share: | $87.67 | ||||
| End price/share: | $214.71 | ||||
| Starting shares: | 114.06 | ||||
| Ending shares: | 127.16 | ||||
| Dividends reinvested/share: | $15.44 | ||||
| Total return: | 173.03% | ||||
| Average annual return: | 22.28% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $27,308.54 | ||||
As we can see, the five year investment result worked out exceptionally well, with an annualized rate of return of 22.28%. This would have turned a $10K investment made 5 years ago into $27,308.54 today (as of 10/21/2021). On a total return basis, that’s a result of 173.03% (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.]
Beyond share price change, another component of ADP’s total return these past 5 years has been the payment by Automatic Data Processing Inc. of $15.44/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 3.72/share, we calculate that ADP has a current yield of approximately 1.73%. 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 $87.67/share purchase price. This works out to a yield on cost of 1.97%.
One more investment quote to leave you with:
“There’s a virtuous cycle when people have to defend challenges to their ideas. Any gaps in thinking or analysis become clear pretty quickly when smart people ask good, logical questions.” — Joel Greenblatt
