“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett
This inspiring quote from Warren Buffett teaches us the importance of considering our investment time horizon when approaching any given investment: Could we envision ourselves holding the stock we are considering for many years? Even a five year holding period potentially?
For “buy-and-hold” investors taking a long-term view, what’s important isn’t the short-term stock market fluctuations that will inevitably occur, but what happens over the long haul. Looking back 5 years to 2017, investors considering an investment into shares of Automatic Data Processing Inc. (NASD: ADP) may have been pondering this very question and thinking about their potential investment result over a full five year time horizon. Here’s how that would have worked out.
| Start date: | 05/30/2017 |
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| End date: | 05/26/2022 | ||||
| Start price/share: | $101.53 | ||||
| End price/share: | $218.28 | ||||
| Starting shares: | 98.49 | ||||
| Ending shares: | 109.60 | ||||
| Dividends reinvested/share: | $16.38 | ||||
| Total return: | 139.23% | ||||
| Average annual return: | 19.09% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $23,919.54 | ||||
As shown above, the five year investment result worked out exceptionally well, with an annualized rate of return of 19.09%. This would have turned a $10K investment made 5 years ago into $23,919.54 today (as of 05/26/2022). On a total return basis, that’s a result of 139.23% (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 1.91%. 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 $101.53/share purchase price. This works out to a yield on cost of 1.88%.
More investment wisdom to ponder:
“Value investing is at its core the marriage of a contrarian streak and a calculator.” — Seth Klarman
