“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
— 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 two-decade period?
Today, let’s look backwards in time to 2001, and take a look at what happened to investors who asked that very question about Lam Research Corp (NASD: LRCX), by taking a look at the investment outcome over a two-decade holding period.
| Start date: | 03/05/2001 |
|
|||
| End date: | 03/03/2021 | ||||
| Start price/share: | $24.69 | ||||
| End price/share: | $551.23 | ||||
| Starting shares: | 405.06 | ||||
| Ending shares: | 450.83 | ||||
| Dividends reinvested/share: | $18.02 | ||||
| Total return: | 2,385.10% | ||||
| Average annual return: | 17.42% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $248,550.56 | ||||
As shown above, the two-decade investment result worked out exceptionally well, with an annualized rate of return of 17.42%. This would have turned a $10K investment made 20 years ago into $248,550.56 today (as of 03/03/2021). On a total return basis, that’s a result of 2,385.10% (something to think about: how might LRCX shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Lam Research Corp paid investors a total of $18.02/share in dividends over the 20 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 5.2/share, we calculate that LRCX has a current yield of approximately 0.94%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 5.2 against the original $24.69/share purchase price. This works out to a yield on cost of 3.81%.
One more investment quote to leave you with:
“All intelligent investing is value investing: acquiring more that you are paying for. You must value the business in order to value the stock.” — Charlie Munger
