For a powerful insight into the value of a growing dividend and its impact on total returns, you don't have to look much further than some of the premier consumer companies we have all known and loved for a long time. While this isn't necessarily news to most investors, I think that in today's context of low Treasury yields and flat economic growth, consumer staples offer some old and new rewards that investors can't ignore.
Let's begin with the 'old.' Peter Lynch once famously said that he got some of his best investing ideas while shopping with his wife - his noted "invest what you know" philosophy. As almost 25 years have passed since the publication of One Up On Wall Street, we now have some total return numbers that any wife would be proud of.
Take a look at just four companies and their respective total returns going back 25 years, with dividends re-invested up to the quarter ending June 29, 2012. Here we have consumer stalwarts like Colgate-Palmolive (CL) 16.2%, Coca-Cola (KO) 13.4%, Kimberly-Clark (KMB) 12.7%, and even much maligned Procter & Gamble (PG) 12.3% showing us what successful long term investing is all about.
In Colgate alone, a $1,000 investment 25 years ago is worth over $43,000 today. A thousand dollars invested in Coke is worth over $23,000 and the amounts for Kimberly and P&G are, respectively, over $20,000 and over $18,000. Not bad for selling toothpaste, toilet paper, and Steve Jobs' infamous "sugared water" (or at least Coke's version of it).
But our story gets better. Not only are these companies producing stellar returns, they're doing it with dramatically reduced risk or volatility. Corresponding betas are as follows: Colgate at 0.34, Coke at 0.43, Kimberly at a paltry 0.16, and P&G at 0.32. With an average beta of 0.31 for our favorite four, I propose a name change for consumer staples stocks - we should start calling them consumer 'stables'!
Now consider the total return for the S&P 500 over the last 25 years - 9.3%. When stacked next to our favorite four (13.6% over 25 years) we're not just 'seeking alpha,' we're actually living it by getting over 13% in total returns while reducing our risk by more than two thirds!
I know, anyone can cherry-pick winners after the fact. But it just can't be ignored that a growing and re-invested dividend, especially over the long run, produces some spectacular results.
Click to enlarge.