“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett
One of the most important things investors can learn from Warren Buffett, is about how they approach their time horizon for an investment into a stock under consideration. Because immediately after buying shares of a given stock, investors will then be able to check on the day-to-day (and even minute-by-minute) market value. Some days the stock market will be up, other days down. These daily fluctuations can often distract from the long-term view. Today, we look at the result of a five year holding period for an investor who was considering Automatic Data Processing Inc. (NASD: ADP) back in 2017, bought the stock, ignored the market’s ups and downs, and simply held through to today.
|Average annual return:||18.66%|
The above analysis shows the five year investment result worked out exceptionally well, with an annualized rate of return of 18.66%. This would have turned a $10K investment made 5 years ago into $23,524.57 today (as of 04/26/2022). On a total return basis, that’s a result of 135.20% (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 $16.38/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 1.87%. 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 $105.16/share purchase price. This works out to a yield on cost of 1.78%.
One more piece of investment wisdom to leave you with:
“Sometimes buying early on the way down looks like being wrong, but it isn’t.” — Seth Klarman