“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
— 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 2000 experienced, who considered an investment in shares of Microchip Technology Inc (NASD: MCHP) and decided upon a two-decade investment time horizon.
| Start date: | 07/10/2000 |
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| End date: | 07/09/2020 | ||||
| Start price/share: | $24.97 | ||||
| End price/share: | $107.55 | ||||
| Starting shares: | 400.48 | ||||
| Ending shares: | 661.45 | ||||
| Dividends reinvested/share: | $20.44 | ||||
| Total return: | 611.39% | ||||
| Average annual return: | 10.30% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $71,117.56 | ||||
The above analysis shows the two-decade investment result worked out quite well, with an annualized rate of return of 10.30%. This would have turned a $10K investment made 20 years ago into $71,117.56 today (as of 07/09/2020). On a total return basis, that’s a result of 611.39% (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 $20.44/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 1.47/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 1.47 against the original $24.97/share purchase price. This works out to a yield on cost of 5.49%.
One more piece of investment wisdom to leave you with:
“As in roulette, same is true of the stock trader, who will find that the expense of trading weights the dice heavily against him.” — Benjamin Graham
