Dividend Reinvestment Revisited: The Coca-Cola Millionaires

Apr.13.14 | About: The Coca-Cola (KO)


KO has been a tremendous investment and a consistent dividend payer over the years.

KO provides a great way to illustrate the power of compounding and investing over time.

Other stocks' performances might not have been as good and there is always the risk of bankruptcy.

The same principles can be applied to other stocks or investments to achieve millionaire status.

The Coca-Cola Company (NYSE:KO) is an iconic American brand and has provided stellar stock performance over the years. In a previous article, I demonstrated how KO stock and dividend reinvestment could make you a millionaire. This article will revisit that analysis with a data set covering over 50 years.

However, KO is an exceptional company that has delivered superior performance. With reinvested dividends, the total compound annualize growth rate is 10.2% per year or just 7.4% for the stock price appreciation. Would one expect KO to repeat this performance? Probably not since that would imply a market valuation of almost $6 trillion after 50 years or about $1.7 trillion in today's value.

The Power of Reinvestment

So let's say you buy just one share and faithfully reinvest your dividends. To simplify, I'll assume you can do that with partial shares. Over the 52 years, that one share valued at $91.25 on March 1, 1962 will become 382 shares valued at almost $15,000. The 382 shares comes from 96 shares due to splits on the initial one share and another 286 shares from reinvested dividends - about 75% of the value of your portfolio is based on reinvested dividends. These dividends could have been very easily frittered away over the years.

Source: Yahoo Finance for data and author calculations

The graph clearly shows that almost half the value of the portfolio is from appreciation on shares purchased with dividends. Furthermore, over the 50+ years you end up collecting substantially more dividends from reinvested dividends than from the dividends from the initial investment.

Reinvestment benefits take time to become noticeable

It seems startling that those reinvested dividends could really add up. In the beginning you have just 1 share. The first dividend for this analysis was $0.60 cents in March 1962 - good to purchase less than 0.006 shares - certainly a long way off from the 286 shares previously mentioned. The next cycle you will get a little more dividend from your 1.006 shares and buy another tiny fraction of a share and so on. The following graph shows the ratio of dividends from reinvestment to all dividends. This also shows the ratio of portfolio value from reinvestment to total value.

Source: Yahoo Finance for data and author calculations

It takes a decade before even 20% of the portfolio's value is from reinvestment and another 12 years to hit the 50% mark. Furthermore, there are steeper parts and flatter parts corresponding to the dividend yield - or the reinvestment rate. The late 70s to early 80s was a period of strong double digit dividend growth and created several dips in stock price resulting in a higher yields resulting in the acquisition of more shares.

Source: Yahoo Finance for data and author calculations

As you receive larger dividends from growth, you're buying more shares if the stock price is also declining. By today, about 75% of the portfolio's value is from reinvested dividends.

So what did it take to become a KO millionaire?

Very small investments over time would be sufficient to become a KO millionaire today. In fact, purchasing 6 shares in 1962 and then making an annual $200 investment would be sufficient. This represents a total capital outlay of just under $11,000. The following graph breaks this down:

Source: Yahoo Finance for data and author calculations

One can clearly see that the end result is not about how much was initially invested, but about reinvesting - reinvesting the dividends and purchasing some additional shares periodically. I can see someone saying that $548 is a lot of money in 1962 - fair enough. You can get a similar result starting with a single share and investing $240 every year or saving up $20 a month for your year end investment. The following graph illustrates this scenario:

Source: Yahoo Finance for data and author calculations

How do I apply these insights today?

The point of this article is not necessarily to find the next KO, if it even exists. The point of this article is the power of investing over time in a consistent manner. Dividend reinvestment is a very simple concept that automates that process.

One could just as easily invest a certain amount every year into a new dividend stock and achieve somewhat similar results. You could even use the broader market with an index fund or a dividend ETF. If you are investing a sufficient amount every year, you don't have to reinvest the dividends. It doesn't matter whether your annual investment capital comes from dividends, earnings, or cash savings. The critical point is that you save and invest and start as early as possible. However, it takes patience and discipline. I've been investing for almost 20 years now. It is only in the past 5 years that I am really starting to see the compounding effect.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.