Of course, if an investor wants to get $1,000 in annual dividends from PepsiCo (NYSE:PEP), he could simply write a check for $30,078 and purchase 486 shares of Pepsi, which would give our friend a $250.29 check every March, June, September, and December based on Pepsi’s current quarterly dividend rate of $0.515 per share. That would come out to $1001.15 per year.
But unfortunately, not everyone has $30,000 burning a hole in their pocket to throw at an investment, and most studies indicate that investors make their investments gradually throughout the year, rather than a one-time lump sum investment. This raises the question—what is a more realistic way for investors to make $1,000 annually in annual Pepsi dividend income if he doesn’t have tens of thousands of dollars to make that initial investment? One of my favorite quotes from Berkshire Hathaway’s (NYSE:BRK.A) Vice-Chairman, Charlie Munger, is to “invert, always invert” when trying to figure out what you need to do to get to your goal.
Over any eight year period dating back to 1998, Pepsi has at least doubled its dividend over that time frame. In fact, over a few rolling eight year periods this decade, Pepsi has tripled its dividend, and that is due mostly to Pepsi’s 16% (yes, you read that right) annual dividend increases over the past five years. Interestingly enough, Pepsi’s payout ratio in 2006 was 38.6%, and if Pepsi meets the analyst consensus earnings estimates by the end of the year, it will only have a 2011 dividend-to-earnings payout ratio of 46.2%. Considering that Pepsi’s annual dividend has grown from $1.16 in 2006 to $2.06 in 2011, that’s a pretty modest increase in the payout ratio. And another fun fact is that if you fully reinvest your dividends along the way, Pepsi has doubled its investors’ annual income every six years dating back to 1998.
The underlying strength of Pepsi’s brands—which range from the beverage collection of Pepsi, Diet Pepsi, Mountain Dew, Gatorade, and Tropicana Orange Juice to the Frito-Lay or Quaker Oats divisions—have provided enough ballast for Pepsi, which was no small company at the beginning of the decade, to grow its earnings by 11.0% annually since 2001. Currently, analysts are projecting 10% earnings growth over the next five years, and I don’t disagree with that projection. Pepsi has a fine strategy of using its 10.7% net profit margin on all products sold to expand the product line-up (by buying Russian dairy company Wimm-Bill-Dann) and increase its market base by aggressively planning expansion in Turkey and India over the next three years. Likewise, Pepsi’s decision to purchase its bottlers last year is projected to save the company over $550 million in 2012. This combination of lowering costs, expanding product line-ups and diversifying the portfolio ought to bode well for dividend growth investors considering Pepsi.
Using Munger’s wisdom and projections about Pepsi’s future growth, it seems realistic to assume that if our investor can come up with a way to generate $500 annually in dividends within four years, then he should be able to double his dividend income to $1,000 within the following six years without contributing another penny to his investment—compounding will take care of the rest—provided he reinvests the dividends along the way until he hits that thousand-dollar plateau.
If you can invest $800 every three months—or $3,200 annually—for the next four years (provided Pepsi raises its dividend by at least 6.5% annually and you don’t pay more than $72.50 for a share), then you will be able to own almost 200 shares of Pepsi which would be paying out $500 in annual dividends ($2.51 per share) at that time. At that point, it would seem realistic for a Pepsi investor to be able to double his annual dividends to $1,000 just by keeping the ‘reinvest dividends’ box checked for the next six years, and watching the money compound.
It’s probably easier for most investors to come up with $3,200 annually for four years instead of $30,000 at one time in order to achieve $1,000 dividends from Pepsi. Of course, the catch is that you have to be patient and wait six years after completing your investment in Pepsi before reaching that $1,000 mark. The old adage is that Napoleon didn’t just wake up one day and find an army of a hundred thousand men—he had to build up his troops piece by piece, picking up 100 soldiers here, 250 there—and that’s how the mindset of a dividend growth investor ought to operate. By putting aside $8.77 every day for four years, you can lay claim to a $1,000 annual dividend stream within a decade, which will hopefully continue to grow from there. If you can get in the habit of just throwing aside a few thousand dollars each year into cash-generating assets like Pepsi, then you can rely on the power of compounding over time to do some of the heavy lifting for you.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.