The Promised Land of Dividend Investing

Sometime in the past twelve months, Realty Income did it. Since becoming a publicly traded company three and a half decades ago, every dollar that you invested into Realty Income back then would be paying you $1.00 in annual dividend income this year. In the next five years, the dividends alone should give you more than 5x your initial investment. That is what can happen when you buy an ownership stake in a business that relentlessly churns out cash, and then you allow it to keep doing its thing while you grow older.

For those of you who are curious about yield-on-cost, here is what the data looks like for thirty-year investments in the following companies, without any dividend reinvestment:

If you bought Coca-Cola in 1983, your $1000 would have grown into $74,000. You’d have $2,125 in annual dividends coming your way. Basically, you’d be looking at a dividend yield-on-cost of 212% each year, giving you twice your initial investment in annual dividends.

In the case of Johnson & Johnson, a $1,000 investment in 1983 would be worth a little over $63,000 today. You’d be collecting $1,787 in dividends, meaning you’d be getting 1.7x your initial investment returned to you in the form of yearly dividends.

For Conoco Phillips, every $1,000 would be worth $54,900 today, and would be paying $2,075 in annual dividends. Basically, you would be getting twice your initial investment returned to you in cash each year. Put another way, you’d be getting a quarter of your initial investment back every 90 days.

Even Disney, with its puny annual dividend, would have a respectable yield on cost by now. A $1,000 investment in 1983 would be worth $66,355 today. You’d be getting about $715 in annual dividends, for a 71.5% current yield on cost. That’s especially impressive considering that Disney spends 4x as much money buying back stock as it does paying dividends, and the current yield is flirting with the 1.00% mark.

And the numbers are unbelievable if you have ever been a long-term tobacco investor in your life. You’d probably own your town by now. A $1,000 investment in the old Philip Morris would be worth $287,000 now, spread out over Altria, Philip Morris International, Kraft, and Mondelez. It’s game over—you’re Daddy Warbucks. A $4,000 (old) Philip Morris investment would have made you a millionaire by now. If you bought a sizable block of the stock back then—say, $100,000 worth—you’d be sitting on a $28.7 million fortune. You’d be able to use the words “summer” and “winter” as verbs. If you folded all that money back up into Altria stock, you’d be making over $4,000 in cold, hard cash every morning that you wake up. Long-term tobacco investing is one of the most mind-blowing areas of investing history to study.

The take-home lessons here should be twofold:

(1)    You only need one investment to substantially change your life. Even if the rest of your investments throughout your life were complete screw-ups, a $10,000 investment in Johnson & Johnson back in 1983 would be paying you over $17,000 in current dividend income. That’s a baby pension right there. People buying Tylenol, Listerine, and whatnot would basically be paying your mortgage for as long as necessary.

(2)    A lot of times, people ignore investments that only yield 2-3% right now because they are not attractive enough to catch attention of people who appreciate nice income. If that company is growing profits by north of 8% annually, it may be worth a look anyway. Crazy things start to happen to the yield-on-cost when you combine growth over 8% with a time horizon of fifteen years minimum.


Originally posted 2013-11-15 08:47:16.

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