“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett
The above quote from Warren Buffett is timeless, and brings into focus the choice about time horizon that any investor should think about before buying a stock they are considering. Behind every stock is an actual business; what will that business look like over a five year period?
Today, let’s look backwards in time to 2018, and take a look at what happened to investors who asked that very question about Automatic Data Processing Inc. (NASD: ADP), by taking a look at the investment outcome over a five year holding period.
|Average annual return:||12.01%|
As we can see, the five year investment result worked out quite well, with an annualized rate of return of 12.01%. This would have turned a $10K investment made 5 years ago into $17,631.29 today (as of 11/13/2023). On a total return basis, that’s a result of 76.29% (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.]
Beyond share price change, another component of ADP’s total return these past 5 years has been the payment by Automatic Data Processing Inc. of $19.68/share in dividends to shareholders. Automatic reinvestment of dividends can be a wonderful way to compound returns, and for the above calculations we presume that dividends are reinvested into additional shares of stock. (For the purpose of these calcuations, the closing price on ex-date is used).
Based upon the most recent annualized dividend rate of 5.6/share, we calculate that ADP has a current yield of approximately 2.47%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 5.6 against the original $142.72/share purchase price. This works out to a yield on cost of 1.73%.
One more piece of investment wisdom to leave you with:
“Only when the tide goes out do you discover who’s been swimming naked.” — Warren Buffett