One of the big stock market stories of recent years is the stunning performance of chipmaker Nvidia (NASDAQ: NVDA). Over the past five years, Nvidia stock has soared 1,776%. Wow!
On top of that there is a dividend, although with a current yield south of 0.1%, the main driver for shareholder returns has been share price growth.
But I did not invest in Nvidia stock five years ago. How have investors done on a shorter timeframe?
Why I invest for the long term
Over the past year, the share price has gone up 60%. So £500 invested 12 months back would now be worth £800 (ignoring exchange rate movements).
That is still an excellent return as far as I am concerned. It significantly beats the 17% increase in the US S&P 500 index over the same period, or the 13% growth in the value of the FTSE 100.
But, while I would have been very happy with such a result, it falls far below what Nvidia stock has managed to do over five years. In that sense, I see this as a useful reminder of why I invest for the long term.
A great investment case like Nvidia’s (massive market, surging demand, unique product technology and largely price-insensitive customers) can produce results in a relatively short timeframe. But it tends to be by taking a longer-term approach that the really impressive growth can start to add up.
Tiny dividends are still dividends
I mentioned above that Nvidia stock has a miniscule dividend yield of 0.03%. On a £500 investment, that would be around 15p a year of dividends.
Bear in mind that that is the current yield. For an investor who bought a year ago, the yield would be higher because the share price was lower. That is even truer for someone who bought five years ago. They would be earning around £2.80 per year of dividends on a £500 investment.
That is still fairly small beer, but In a Stocks and Shares ISA, for example, those dividends could be piling up free of tax, ready to be reinvested in other shares.
But, again, the current dividend only tells one part of the story. While the yield is paltry, the dividend per share has been growing fast. Last May, for example (allowing for the impact of Nvidia stock splitting), the quarterly dividend per share grew 150%.
With a large market, massive profits (net income was $19.3bn in the most recent quarter) and proven cash generation ability, I think there is plenty of scope for Nvidia to keep raising its shareholder payout significantly.
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Should I bite the bullet and invest now?
Although I did not buy Nvidia stock a year ago, I do believe in the growth story here. So will I invest £500 today?
I am sorely tempted, but I do not plan to. With a price-to-earnings ratio of 50, the valuation simply looks too rich for my tastes.
After all, as the Deepseek launch suggested, AI technology that requires less processing power could lead to a sudden plunge in demand for high-end chips. If buying Nvidia stock I would want a price with a margin of safety that makes me feel comfortable.
This story originally appeared on Motley Fool
