There is a reader of this website who purchased shares of Altria stock in 2009 when the rest of the world was falling apart during the Great Recession. I have often mentioned on this website that it only requires a small handful of decision, technically only one, to gradually replace the income that you earn from your labor with income that you earn from a passive source such as ownership in a great business.
Altria was always an interesting business because it typically traded at a low valuation due to the stigma around owning tobacco stocks as well as the existential question of whether its core business model would be effectively regulated out of existence. The 2008-2009 time period added a few additional elements weighing upon valuation, including the spinoff of Philip Morris International and Kraft such that Altria became a standalone domestic manufacturer of tobacco at precisely the same the world was entering a recession that dramatically reduced the value of nearly all U.S. equities.
As a result, Altria investors were faced with the opportunity to purchase the stock between $14 and $20 per share. Assuming a purchase price at the $17.50 midpoint, the prospective Altria shareholder was able to get his hands on a company pumping out $1.32 per share in dividends for a starting dividend yield of 7.5%. All the company had to do was survive, and exemplary double-digit returns were about as primed to occur as one could hope to find in the stock market.
For someone evaluating Altria stock as a business enterprise rather than as a “stock” with daily on-screen fluctuations, the profits on the balance sheet were there. Altria earned $1.66 per share in 2008, $1.76 per share in 2009, and and $1.87 per share. It was a business growing at 6% while the worst recession that many investors had seen in their lifetimes was occurring.
If the stock could be put inside a tax-protected shelter like a Roth IRA, approximately 285 shares could be put away (the 2009 limits were $5,000 in annual contributions) that could then be free to compound tax-free over an investor’s lifetime. Those dividends would become an investor’s best friend, as they could function as effective additional contributions to give an investor an ongoing stream of dry powder to fund new investments or those Altria dividends could be reinvested tax-free in the spirit of “hey, Jeremy Siegel’s research said this was the best investment from 1956-2003, let’s buy some and let it ride and see what happens.”
On a per share basis, Altria paid out $23.24 in dividends since the financial crisis. For someone who does not reinvest, those 285 shares would have generated $6,623.40 in income that could have been redeployed elsewhere. On a present basis, the dividend stream would be $912 per year, which, given that the current Roth IRA contribution limits are $6,000 per year, would mean that investor could effectively add 15.2% to their cash flowing through their account as the Altria dividends mix with the additional investment capital contributed from your labor. Further, the $6623.40 in cumulative dividend figure is understated, as it assumes that each dividend from 2009 through the present would sit as cash on the balance sheet, which is a tremendous understatement to the extent that it treats the opportunity cost of cash as zero when that money could have been put into other investments over time.
Alternatively, for the investor that chose to reinvest those dividends over time, a total of $37.80 per share would have been generated on dividends (due to the phenomenon of “compounding upon compounding” when dividends are used to buy additional shares that, in turn, generate their own dividends).
The average reinvestment price would have been $34.23 over time. That is a total of $10,773 in total dividends that would result in additional 314 shares of MO added to the Roth IRA. This investor would be sitting on 599 shares today, generating $1,916 in annual dividends, meaning each year 38% of their initial 2009 cost was being generated in 2019 dividends.
For an investor contributing the $6,000 annual super-max contribution to a Roth IRA in 2019, those $1,916 in Altria dividends would mean $7,916 would be swirling into the account due to a combination of fresh capital and Altria dividends.
The lessons that I take from this scenario is that it takes several years of dividend accumulation for the compounding to really get going. There are some S&P 500 components today yielding over 4% that have a long-term earnings per share growth rate of in excess of 8%. Those stocks are the most promising candidates to be the way to accomplish this type of investment success today.
Also, investors sometimes act like these lucrative investments of yesteryear are not available today. Not true! Every year, there is always at least one opportunity that arises that should be within the small investor’s circle of competence to maximize. For heaven’s sake, it was only five months ago that Chevron stock fell to $100 per share around Christmas Eve and had a dividend yield of around 5%. You don’t think someone who bought 55 shares of Chevron in a Roth IRA in December 2018 won’t be overflowing with income from that selection in 2028? Of course he will. It comes down to having the available cash, studying the characteristics of high-yield dividend investments that result in outperformance, and striking when the valuation smacks you in the face as a good deal. Ammunition on hand, eyes open, execution.
Originally posted 2019-05-31 12:34:37.
