Last week, Coca-Cola announced that the quarterly dividend was going to increase from $0.305 per share to $0.33 per share. It is that announcement every February, dating back to 1963, that explains why I find this company so appealing. Truth to be told, as nice as the income increases are, it is really the consistent earnings power represented by that dividend increases that catches my attention.
I want to be sure I separate the roots from the leaves: The real reason that Coca-Cola is such an attractive investment is that there are 500 nonalcoholic beverages across 210 countries earning $0.275 profits on every $1 paid by the customer. You buy a case of Coca-Cola for $7, the company goes and makes $1.92 in profit that can be paid out to shareholders, used to repurchase stock, or make new bottling/drink acquisitions. It’s a little bit more complicated than that—I used the mean product offering profit margins—so that Coca-Cola itself would be more profitable than, say, something like Diet Fanta (does that even exist?) but the attractiveness of the business model is clear.
When I started writing finance articles in 2011, Coca-Cola paid out $0.94 per share in dividends (in reality, if you were there at the time, there was not yet a 2 for 1 stock split so you actually had half as many shares paying twice as much, but I normalized this difference to avoid confusion). Now, it is going to be paying out $1.32 per share in dividends. That is a 40% spike in income payouts; how many jobs involving actual labor get to see that kind of growth from 2011 through 2015? And that involves working hard. In the case of Coca-Cola, you are a passive owner seeing those gains.
What makes the results even better than you might think is that the 8.2% dividend increase gets to mingle with dividend reinvestment to create outsized results. Let’s say you own 1,000 shares of the stock purchased at $41 per share for a total investment of $41,000. You collect the $1,320 in annual income, and let’s say the reinvestment price is at $41. You are going to pick up 32.2 new shares of Coca-Cola. Actually, the result will be a little bit better than this because the compounding takes place quarterly not annually, but this is a close enough back-of-the-envelope approximation.
If the 2016 dividend payment got increased by 8.2% again, you’d see a quarterly payment of $0.357 or $1.428 annually. But here is the thing: Your growth wouldn’t be just that 8.2% because you’d now have 1,032 shares paying out $1.428 annually. You’d actually collect $1,473 compared to the $1,320 in the year before.
Why did I walk you through this math? Because with just one year of Coca-Cola dividends getting reinvested, you got to see your income grow 11.59%. The actual figure may be lower than that if people bid up the price of Coca-Cola in the next year (dividends reinvested at $50 per share don’t create as many fresh shares, and those that half of the compounding equation gets lowered) but that is the existing potential based on the market prices of today.
I write about strategies that I believe are sustainable. It would not be filling for me to write about airline stocks or discuss the moment in time that Windstream would become worthy of value investment consideration because that kind of investing is very ephemeral. There’s a timer set, and you need to get out before it goes off otherwise your investment value might collapse. No, I’ll happily take a lower overall compounding rate if I believe that I am stacking in the odds in terms of certainty. When I first started writing about investing, Coca-Cola was nearing 50 years of annual dividend increases. You already knew about Buffett’s legendary 400,000,000 share position. You already saw those neat stock charts that showed how one $40 share purchased during the 1920 IPO turned into $10 million (or $20 million if you bought during the sugar collapse in 1921, but hey, the 1920 results will do just fine) as of 2012.
But the joy of it all is the sustainability of the process. The dividend increased in 2012. It increased in 2013. It increased in 2014. It increased in 2015. The strength of the brands continue to reveal itself. Now, obviously dividend raises are a decision of the Board of Directors—they could cut the dividend next year, and wouldn’t change the profit engine of the companies or the fact that’s a lucrative investment. It’s not the dividend itself that is the source of value, but rather, the highly lucrative profits in the well-branded beverage industry that give the Board the capacity to raise the dividend for five decades running. This happens to create an underrated way to compound the growth in your passive income. Last week, the 8.2% announcement happened, and then people continued to move along like it was no big deal. Yet, with dividend reinvestment, the income growth is in the 11% range. That’s why I’m here—to bring to your attention how much it can change your life to just select a few companies well, reinvest while you’re job gives you a surplus, and see how the income grows at a rate faster than most people might guess if they don’t follow this stuff.
Originally posted 2015-02-23 02:18:15.