“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett
The wisdom of Warren Buffett reflects a value-based philosophy about investing that says investors are buying shares in a business, and encourages strategic thinking about investment time horizon. Before placing a buy order for a stock, a great question we can ask is whether we would still be comfortable making the investment if we couldn’t sell it for many years?
A “buy-and-hold” approach may call for a time horizon that spans a long period of time — maybe even lasting for a five year holding period. Suppose such a “buy-and-hold” investor had looked into buying shares of Automatic Data Processing Inc. (NASD: ADP) back in 2017. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
|Average annual return:||16.84%|
As we can see, the five year investment result worked out exceptionally well, with an annualized rate of return of 16.84%. This would have turned a $10K investment made 5 years ago into $21,774.98 today (as of 02/28/2022). On a total return basis, that’s a result of 117.74% (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.]
Notice that Automatic Data Processing Inc. paid investors a total of $15.91/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 4.16/share, we calculate that ADP has a current yield of approximately 2.03%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 4.16 against the original $104.53/share purchase price. This works out to a yield on cost of 1.94%.
Here’s one more great investment quote before you go:
“When you sell in desperation, you always sell cheap.” — Peter Lynch