“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”
— Warren Buffett
Such a great quote from Warren Buffett, highlighting the importance of investment time horizon when considering making an investment. In the short run, who knows what the stock market will do? A week or two after buying any given stock, could the entire stock market fall out of bed? Quite possibly! Should that happen, how would you react? It is an excellent question to think about before hitting the buy button.
For investors who take a multi-year time horizon, the important thing is not what happens in the next week or two, but what the result will be over the long haul. Today, we look at the result investors of the year 2002 experienced, who considered an investment in shares of Automatic Data Processing Inc. (NASD: ADP) and decided upon a twenty year investment time horizon.
|Average annual return:||12.95%|
As we can see, the twenty year investment result worked out quite well, with an annualized rate of return of 12.95%. This would have turned a $10K investment made 20 years ago into $114,367.94 today (as of 10/17/2022). On a total return basis, that’s a result of 1,044.06% (something to think about: how might ADP shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Many investors out there refuse to own any stock that lacks a dividend; in the case of Automatic Data Processing Inc., investors have received $35.59/share in dividends these past 20 years examined in the exercise above. This means total return was driven not just by share price, but also by the dividends received (and what the investor did with those dividends). For this exercise, what we’ve done with the dividends is to assume they are reinvestted — i.e. used to purchase additional shares (the calculations use closing price on ex-date).
Based upon the most recent annualized dividend rate of 4.16/share, we calculate that ADP has a current yield of approximately 1.78%. 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 $32.12/share purchase price. This works out to a yield on cost of 5.54%.
Here’s one more great investment quote before you go:
“Experience taught me a few things. One is to listen to your gut, no matter how good something sounds on paper. The second is that you’re generally better off sticking with what you know. And the third is that sometimes your best investments are the ones you don’t make.” — Donald Trump