“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
— Warren Buffett
The wisdom of Warren Buffett reflects a value-based philosophy about investing that says investors are buying shares in a business, and encourages strategic thinking about investment time horizon. Before placing a buy order for a stock, a great question we can ask is whether we would still be comfortable making the investment if we couldn’t sell it for many years?
A “buy-and-hold” approach may call for a time horizon that spans a long period of time — maybe even lasting for a two-decade holding period. Suppose such a “buy-and-hold” investor had looked into buying shares of Microchip Technology Inc (NASD: MCHP) back in 2004. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
| Start date: | 10/25/2004 |
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| End date: | 10/22/2024 | ||||
| Start price/share: | $14.61 | ||||
| End price/share: | $75.43 | ||||
| Starting shares: | 684.46 | ||||
| Ending shares: | 1,200.64 | ||||
| Dividends reinvested/share: | $15.42 | ||||
| Total return: | 805.65% | ||||
| Average annual return: | 11.64% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $90,502.08 | ||||
The above analysis shows the two-decade investment result worked out quite well, with an annualized rate of return of 11.64%. This would have turned a $10K investment made 20 years ago into $90,502.08 today (as of 10/22/2024). On a total return basis, that’s a result of 805.65% (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.]
Notice that Microchip Technology Inc paid investors a total of $15.42/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 1.816/share, we calculate that MCHP has a current yield of approximately 2.41%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.816 against the original $14.61/share purchase price. This works out to a yield on cost of 16.50%.
Here’s one more great investment quote before you go:
“The individual investor should act consistently as an investor and not as a speculator. This means that he should be able to justify every purchase he makes and each price he pays by impersonal, objective reasoning that satisfies him that he is getting more than his money’s worth for his purchase.” — Benjamin Graham
