“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
— Warren Buffett
Investors can learn a lot from Warren Buffett, whose above quote teaches the importance of thinking about investment time horizon, and asking ourselves before buying any given stock: can we envision holding onto it for years — even a twenty year holding period possibly?
Suppose a “buy-and-hold” investor was considering an investment into Microchip Technology Inc (NASD: MCHP) back in 2000: back then, such an investor may have been pondering this very same question. Had they answered “yes” to a full twenty year investment time horizon and then actually held for these past 20 years, here’s how that investment would have turned out.
|Average annual return:||11.94%|
As shown above, the twenty year investment result worked out quite well, with an annualized rate of return of 11.94%. This would have turned a $10K investment made 20 years ago into $95,493.64 today (as of 01/24/2020). On a total return basis, that’s a result of 854.82% (something to think about: how might MCHP 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 Microchip Technology Inc, investors have received $19.70/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 1.466/share, we calculate that MCHP has a current yield of approximately 1.37%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.466 against the original $18.41/share purchase price. This works out to a yield on cost of 7.44%.
More investment wisdom to ponder:
“In the short run, the market is a voting machine but in the long run, it is a weighing machine.” — Benjamin Graham