After publishing my recent article on Johnson & Johnson, I wanted to perform my own case study on the reinvestment impact of Johnson & Johnson dividends over a decent stretch of time to isolate the wealth-creating effect of a small initial dividend amount that grows at a rate of 9-10% annually and gets reinvested along the way.
I chose 2002-2016 as the random measurement period because of a numerical quirk that makes the dividend growth rate seem more tangible. In 2002, the annual dividend was $0.80 per share. By 2016, the quarterly dividend had grown to $0.80 per share. There aren’t many places in Western Civilization where you can honestly quadruple your money through passive means in fourteen years (and if you know of any, feel free to share.)
Despite this 10% annual dividend growth, many people ignore regularly adding fantastic companies like Johnson & Johnson to their household’s balance sheet for a variety of reasons, which usually include: (1) It lacks sexiness. Everyone has heard of it. There is no sophistication attached to the investment. It doesn’t impress anyone as a particularly insightful or brilliant move. All it does is reliably pound out cash year after year; (2) It doesn’t have an obvious hook for value investors. Among many people that actively participate in the stock market, they either want something that is growing fast or something that looks like it is cheap and trading at a low P/E ratio or low price-to-book. Johnson & Johnson never falls into either category; (3) people that invest for income tend to overweigh present income possibilities compared to future income possibilities. This results in neglect of stocks with an initial yield in the 1% to 2% range like Johnson & Johnson since it requires significant delayed gratification to get the annual income amount up to an impressive level; (4) people tend to not appreciate companies that grow earnings while the stock price languishes, discarding firms like Johnson & Johnson for trading in the $60s for years and years even though the earnings were dutifully growing along the way.
The 2002-2016 compounding period for Johnson & Johnson is interesting because the dividend was growing at a 10% rate while the price of the stock tended to stay in the $60s. Most of the capital appreciation happened during the back end of this comparison period, with the stock hitting $72 in 2012, $96 in 2013, $109 in 2014, $106 in 2015, and $126 in 2016 (with the current price at $118.) This works out wonderfully for long-term compounders as you get to enjoy years and years buying additional shares in the $60 range only to get dragged up to $100+ during the last few years of the period.
Specifically, Johnson & Johnson paid out $29.12 per share in dividends between 2002 and 2016 for those that did not reinvest at all along the way.
For those that did, the amount of money that got reinvested per share was $38.17, as the money got to benefit from 14 years of dividends creating new shares that also paid out their own dividends. And best of all, the average reinvestment price during this period was only $67.84 as product recalls during the late 2000s meant that the stock spent years languishing at a P/E ratio in the low teens.
The result is that each share of Johnson & Johnson purchased in 2002 with dividends reinvested went on to create 0.56 new shares, and that average reinvestment price of $67.84 has almost doubled to the current market quote at $118.
A demo of how this would work if you purchased 100 shares of Johnson & Johnson at $50 per share for $5,000 back in 2002:
156 shares valued at $118 per share for a total value of $18,408.
The income side is that the 100 shares paying out $0.80 annually or $80 back in 2002 grew into 156 shares paying out $3.20 or $499. The dividend itself quadrupled, but because of the added share count from reinvestment, the multiplier was really 6.23. If someone had arranged their affairs to be collecting $8,346 in 2002 Johnson & Johnson dividends, he would now be collecting a little bit over $52,000 per year in dividends which is roughly equal to what the average Midwestern household brings in annually.
And the best part of it all is that you did it owning one of the safest investments in the entire world. It would surprise me if someone reading this site could name two dozen publicly traded corporations that have a higher earnings quality than Johnson & Johnson. And here it is, sextupling an investor’s annual income over fourteen years. Because the valuation languished while the dividend growth rate was high, and the valuation picked up at the end of the comparison period, I would not wager that the next fourteen years would be as nice, but if the next fourteen years provide 0.7x of what this measuring period did–well, it it still an objectively satisfying investment experience.
And it does illustrate the principle that collecting a lot of dividend income while valuations are low can often rack up impressive annual income gains down the road. That is a reason why I cover stocks that the market disfavors like Royal Dutch Shell which now yields around 8% at $47 per share. Even if the dividend were cut in half, the net compounding effect should still be impressive as the price of the stock will probably double sometime within the next decade. Meanwhile, a high dividend continues to get reinvested at a high rate. Since the oil decline of 2014, an investor in Royal Dutch Shell has been able to turn 100 shares into 120+ shares today with reinvestment.
It continues to catch my attention that very run-of-the-mill, well-known companies continue to churn out impressive income gains for investors that stick around a few years. I’ve often found that the people that feel burned by such stocks are short-term holders that experience a 10% to 20% price downtick while only getting the chance to collect 2-5% dividend income so there is a moderate paper loss over a year or two. For your own sake, you need to plow through this. In hindsight, these moments will almost always be viewed as the total return accelerators that Dr. Siegel discusses. The income growth at Johnson & Johnson between 2002 and 2016 depicts the importance of waiting periods of languishing stock prices (especially when earnings are growing!) while also showing that low initial yield stocks shouldn’t be ignored when the dividend growth rate is in the 7-11% long-term range.