The Dividend Income Magical Mystery Tour

Includes: JNJ, KO, MCD, PG, XOM
by: Regarded Solutions

[Editor's note: This article has been revised since original publication, as the author erred in the numbers presented. Apologies for any confusion this may have caused.]

Last week I wrote this article detailing how the Team Alpha Retirement Portfolio might look if and when the market has a correction or a collapse. I focused not only on the entire value of the portfolio, but specifically on the income stream that remained virtually unchanged through each scenario.

It became very clear that some folks fail to see the "magical" power of an original dividend yield on cost, and the impact it could have on a simple retirement portfolio. Some of the comments were ill-informed to say the least. While there are plenty of different strategies that individual investors take, a dividend income investor seeking alpha for a more financially secure future, should pay close attention to what I am about to show you.

I have nothing up my sleeves ladies and gentleman. Step a little closer to see that I am not even using slight of hand!

In The Beginning

Let me take you in my time machine and go back 19 years. 1994 was a pretty good year. I was 45 years old and thoughts about my financial future had worked its way to the front of my brain. For this lesson, let us assume that 250 shares in each of 5 stocks were purchased in dividend winning, blue chip, mega cap, name brand stocks.

Johnson & Johnson (NYSE:JNJ), Exxon Mobil (NYSE:XOM), Coca Cola (NYSE:KO), McDonald's (NYSE:MCD), and Procter & Gamble (NYSE:PG).

Since we had embarked on our dividend income journey, let's take a look at the actual numbers from that spring day in May of 1994, just 19 years ago:

Stock Price 1994 YOC
JNJ 44.25 2.50%
XOM 60.38 4.80%
KO 39.13 1.80%
MCD 57.01 0.75%
PG 53.01 2.70%

You can look it up, these numbers are quite accurate. Today, they look almost silly, but Don't you wish we could REALLY go back in time now?

Now, in each of these companies, we purchased 250 shares of stock. A tidy sum in 1994, but very doable for many folks I believe. Take a look at our initial portfolio:

Stock Orig Shares Orig Value
JNJ 250 11,062
XOM 250 15,095
KO 250 9,782
MCD 250 14,250
PG 250 13,250
TOTAL xxx 63,439

Not a bad start in 1994. Most of us who are retired now, were still working and if we had a decent job, we were making a pretty good living and might have had about $65k to invest in our financial future.

We now owned some quality stocks, and even received an annual income of $1,590. We chose not re-invest the dividends although many other investors did. Let's just say we used the money to take a nice little vacation, but left the stocks alone. We did not add shares, nor did we sell shares.

The Definition Of Dividend Yield On Cost

Before we hop back on the time machine, I think it is a good idea to offer this definition of YOC from Investopedia:

The annual dividend rate of a security divided by the average cost basis of the investments. It shows the dividend yield of the original investment. If the number of shares owned by the investor does not change, the yield on cost will increase if the company increases the dividend it pays to shareholders; otherwise it will remain the same.

Since we already did our research and found that these companies had a long history of increasing dividends every year, while never missing a payout, we were confident in our strategy.

Our original yield on cost was acceptable at the time, and the stocks were held for the next 19 years without doing anything other than monitoring them.

Ok, everyone back on the time machine. We are returning to May 4th, 2013.

Some Sight Seeing Stops On The Way Back

On our magical journey we needed to make a few stops along the way. Some events needed to be seen and duly noted prior to returning from our time travels.

We found that each of these stocks split. The splits were 2:1 in each case, and each stock split twice. Let's have a look:

Stock Year Split
JNJ 2001 2::1
JNJ 1996 2::1
XOM 2001 2::1
XOM 1997 2::1
KO 1997 2::1
KO 2012 2::1
MCD 1999 2::1
MCD 1994 2::1
PG 2004 2::1
PG 1997 2::1

These are accurate, you can check them out to make sure I am not pulling any rabbits out of my hat. The impact of stock splits will have a dramatic, if not "magical" effect on our portfolio and our dividend income as you will see in a moment.

Of course the other sight seeing stops along the way back, were to take note of the annual dividend increases in each stock. Not one of the 5 companies missed an increase in any of the 19 years. The magical mystery tour will soon be in full effect!

Please Watch Your Step, We Are Back On May 4th, 2013

Disembarking from our time machine will be a fun experience I assure you. Yes we are 19 years older and many of us have retired. Just by virtue of making the initial purchases in 1994, and doing absolutely nothing since then, our portfolio has a slightly "magical" new look to it.

Let's take a look at our first chart. It shows the share price as of now, the annual dividend paid for each, and the YOC based on our original purchase:

Stock Price Now Dividend YOC
JNJ 85.75 2.64/shr 27%
XOM 89.96 2.52/shr 17%
KO 42.24 1.12/shr 11%
MCD 102.92 3.08/shr 21%
PG 78.19 2.41/shr 17%

Remember, the only action we took was our initial purchase. As you can see, based on the yearly dividend increases of each stock, the original YOC is now remarkably high. The dividend payments are also quite impressive. In 19 years, how has all of this affected our portfolio value and income stream? Keep in mind the stock splits along the way as well.

Take a look at our portfolio now:

Stock Shares Value Income
JNJ 1000 85,750 2,640
XOM 1000 89,960 2,520
KO 1000 42,240 1,120
MCD 1000 102,920 3,080
PG 1000 78,190 2,410
TOTAL xxx 399,060 11,770

Was this magic? Luck? Or just dividend income investing that began in 1994? You know the answer to that, and the 2013 value is REAL as well as the dividend income stream as of now.

Obviously we cannot go back in time to start over with what we know now. The point is that YOC is amazingly important for investors to understand, and as you can see, a $65k investment has become a $400 thousand portfolio in 19 years.

This little portfolio also went trough some rather awful recessions. Visit this site for every recession the USA has had since 1789, but the two recessions that had a dramatic impact on this portfolio occurred in 2001, and 2007-2009.


The 1990s were the longest period of growth in American history. The collapse of the speculative dot-com bubble, a fall in business outlays and investments, and the September 11th attacks,[46] brought the decade of growth to an end. Despite these major shocks, the recession was brief and shallow.[47] Without the September 11th attacks, the economy might have avoided recession altogether.[46]


The subprime mortgage crisis led to the collapse of the United States housing bubble. Falling housing-related assets contributed to a global financial crisis, even as oil and food prices soared. The crisis led to the failure or collapse of many of the United States' largest financial institutions: Bear Stearns, Fannie Mae, Freddie Mac, Lehman Brothers and AIG, as well as a crisis in the automobile industry. The government responded with an unprecedented $700 billion bank bailout and $787 billion fiscal stimulus package. The National Bureau of Economic Research declared the end of this recession over a year after the end date.[51]

In every recession, the markets have ultimately recovered. For the investors who have fled in fear, they have not recovered from these last two periods. For those who focused on the dividend income and the YOC, virtually all investments are intact and healthy.

I submit this magical mystery tour, for this time frame, because most of us were at the age of financial reasoning and awareness. The doom and gloom groups of today, will insist that this magical scenario cannot happen again.

I will simply disagree completely, and will continue to argue with my opinions until more and more folks grasp the potential.

Disclaimer: The opinions of the author is not a recommendation to buy or sell any securities. Please do your own research prior to making any investment decisions.

Disclosure: I am long JNJ, XOM, MCD, KO. 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.

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