“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 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 ten year holding period. Suppose such a “buy-and-hold” investor had looked into buying shares of Automatic Data Processing Inc. (NASD: ADP) back in 2012. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
| Start date: | 08/31/2012 |
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| End date: | 08/30/2022 | ||||
| Start price/share: | $50.99 | ||||
| End price/share: | $245.59 | ||||
| Starting shares: | 196.12 | ||||
| Ending shares: | 246.52 | ||||
| Dividends reinvested/share: | $26.20 | ||||
| Total return: | 505.43% | ||||
| Average annual return: | 19.72% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $60,517.54 | ||||
As we can see, the ten year investment result worked out exceptionally well, with an annualized rate of return of 19.72%. This would have turned a $10K investment made 10 years ago into $60,517.54 today (as of 08/30/2022). On a total return basis, that’s a result of 505.43% (something to think about: how might ADP shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Automatic Data Processing Inc. paid investors a total of $26.20/share in dividends over the 10 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 1.69%. 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 $50.99/share purchase price. This works out to a yield on cost of 3.31%.
Another great investment quote to think about:
“I believe in the discipline of mastering the best that other people have ever figured out. I don’t believe in just sitting down and trying to dream it all up yourself. Nobody’s that smart.” — Charlie Munger
