Money makes money, and the money that money makes makes money
- Benjamin Franklin
A great deal of attention is being focused on speculators who trade stock commission-free, make a few cents profit on a share, and find another stock to trade. Of course, there are variations to this approach, but the common denominator is that they hope to make money by buying and selling quickly and repeatedly. How does their strategy compare to holding a stock for the very long term and reinvesting dividends? The answer will surprise many people, and Coca-Cola serves as a very good example.
Founded in 1892, Coca-Cola caught on quickly. By 1919, the company was able to have its stock listed on the New York Stock Exchange. An investor who had purchased just one share at the IPO for $40, held on, and reinvested all the dividends paid since then would now have a portfolio worth more than $10 million!
But it was not necessary to hold the stock for more than a century to make a huge profit. Had that investor purchased $500 of stock in Coke in 1970 and reinvested the dividends, by 2020 it would have grown to more than $1.3 million.
How can $500 in stock turn into $1.3 million? The answer is very simple: by reinvesting the dividends.
Coke pays a dividend and shareholders who reinvest that dividend will get additional shares. The next time Coke pays a dividend, he or she will get even more dividends and thus be able to purchase still more shares. By repeating this process investors will steadily increase the dividends they receive as well as the number of shares they own. Over time, both of those could become very significant.
And if the investor is lucky and the company grows steadily, it may increase the dividend it pays. The Motley Fool notes that Coca-Cola has increased its dividend for 58 consecutive years and has paid 400 dividends since 1920 (it pays one every quarter).
Over the years, many ordinary people who owned shares in Coke became multi-millionaires simply by reinvesting their dividends. There are countless more who didn’t become multi-millionaires but nevertheless made so much profit on the stock that it made a major difference in their lives. Interestingly, many of them live or once lived in Quincy, Florida, and there’s a story behind this.
The Banker’s Advice
Mark Welch Munroe lived in Quincy during the Depression. A banker by trade, he was also very perceptive and a sharp observer of people. Munroe noticed that no matter how impoverished the person, no matter how needy his circumstances, he or she would always spend their last nickel on a cup of Coke. This observation convinced him to buy shares as quickly as he was able to.
But Munroe didn’t stop at that. Whenever anyone came to take a loan, he always encouraged that person to borrow extra money to buy shares in Coke. Over time, he convinced farmers, teachers, grocers, and other locals to become shareholders. More importantly, he encouraged them to hold the stock no matter how sharply the market fluctuated in the short term.
The results were incredible: Quincy became the wealthiest town per capita in the US. One estimate is that at least 67 of the town’s original 4,000 people became Coca-Cola millionaires. Coca-Cola stock not only changed the course of their lives, but the lives of their families as well.
The dividends also had a spillover effect, as it helped the town survive during the Great Depression and in every recession since then. A single share of Coca-Cola purchased in Munroe’s era with dividends reinvested is now worth over $10 million. Even more amazing: That single share now pays $270,000 in dividends every year.
Of course, many of the people who purchased shares in Coke bought more than one share. An investor who had purchased one hundred shares, for example, now has more than $1 billion.
“I Will Never Sell”
The most famous shareholder in Coca-Cola is Warren Buffett, one of the most successful investors in the world. Buffett became a shareholder in 1988 when he purchased 6.2% of the company for $1 billion. Over the years he has added to that position. In 2020, this stake had grown to 9.2% of the company and is now worth approximately $22 billion. This investment pays an amazing $656 million in dividends every year.
Considering the dividends he has earned, Buffett’s shares have an adjusted cost of just $3.24. This means he is doubling his investment every two years from dividends alone. On numerous occasions, Buffett has said that he will never sell a single share of Coke.
Much of Coke’s gains began early in the company’s growth phase. Will Coke be able to sustain that pace in the years ahead? Perhaps, but even if not, it still may be able to generate significant growth and continue to pay dividends. At a recent price of approximately $50, the stock was yielding 3.3%.
Investors considering buying stocks through DRIPs (dividend reinvestment plans) will first want to check with their financial advisor to verify that those dividends are considered safe. Whether they are or not, earnings and dividends are always subject to change. For example, Ross Stores had qualified to be among a select group of “Dividend Aristocrats,” companies that increased their dividend payouts for at least 25 consecutive years. However, as a result of the financial havoc caused by COVID, Ross’s business was seriously impacted, and in May, the stock was removed from the list of Dividend Aristocrats.
Some investors interested in DRIPs focus on companies that have been increasing their dividends; in such cases, even if a company’s current yield is low, over time it may go much higher. Moreover, shares of companies that steadily increase their dividends “usually hold up better in down markets than more speculative stocks,” according to Arbor Investment Planner.
Of course, investors can always reinvest their dividends on their own. However, there may be certain advantages to doing this through a company plan, such as saving them the trouble of doing this on their own, and in some cases, being able to purchase shares at a slight discount to their market prices.
In early July 2020, Kiplinger compiled a list of 65 Dividend Aristocrats. The top five at that time were: Roper Technologies, S&P Global (f/k/a McGraw-Hill Financial), Sherwin- Williams, Cintas, and Ecolab. This list is based on recent data but is not up to the moment.
And wtop.com listed nine companies that have paid dividends for more than 50 years. They include: California Water Service Group; Coca Cola; Colgate Palmolive; Farmers & Merchants Bancorp; Genuine Parts; Hormel Foods; Johnson and Johnson; Lowe’s Companies; and Stanley Black & Decker.
Investors also can get lists of companies that have been paying dividends regularly for many years and that offer DRIPs by going online; some brokers make this information available to their clients. They can also check the websites of companies that interest them to get more information.
Markets are especially volatile these days, and news that could impact particular companies as well as the market as a whole seems to be breaking faster than ever. Always check with your advisor about the investments best suited to you even when considering the relative safety of dividend-paying companies.
Coca-Cola was used as an example to show the power of dividend reinvestment, but the point also could have been made with many other companies.
In reality, while holding a stock for many decades certainly happens in real life, people sometimes need to sell their assets for a variety of important reasons, such as paying an urgent bill, helping relatives or friends, or contributing to organizations that are important to them. In situations like these, selling valuable stock is a likely solution.
It seems that things really do go better with Coca-Cola.