The back of Coca-Cola's (KO) proxy statement recently stopped me in my tracks.
It declared that just one $40 share of the company's stock bought in 1919, with dividends reinvested, would be worth $9.8 million today.
Yup, $9.8 million. That's quite a feat. But could an investor today replicate a similar scenario?
The answer is yes, but with caveats.
The Keys to Hypercaffeinated Returns
Let's put our lucky Coca-Cola stock holder's returns in perspective.
First, while $40 in 1919 may sound like a lot, it's the equivalent of about $531 today. It's a somewhat significant sum of money, but with some concentrated cost-cutting over a few months -- of cutting cable or skipping dining out for a while -- it's an amount that's not all that difficult for the average American to save up.
Obviously, the time frame (93 years) is more than a decade longer than the average American's life expectancy, so it's unlikely any one person lived long enough to toast their $10 million good fortune. But their heirs certainly were around to thank grandpop for his savvy investment. A similar time frame could be achieved by buying stock today for a newborn child or grandchild.
So we've accounted for two main factors for the Coke investor's long-term success -- a decent-sized initial investment and the wherewithal to hold on to that stock for a lifetime.
However, the most difficult part of achieving this scenario today is that very few companies last as long as Coke has.
Stocks with Staying Power
As you can see, the Dow Jones Industrial Average (a representation of the major companies of the time) in 1920 looked quite different than it does today:
|1920 Dow||Dow Today|
|American Car & Foundry||Alcoa|
|American Locomotive||American Express|
|American Sugar||Bank of America|
|American Telephone and Telegraph||Boeing|
|Central Leather||Cisco Systems|
|Republic Iron and Steel||General Electric|
|Texas Company||Home Depot|
|U.S. Steel||International Business Machines|
|Utah Copper||Johnson & Johnson|
|Western Union||JPMorgan Chase|
|Westinghouse Electric||Kraft Foods|
|Procter & Gamble|
Believe it or not, only six companies from the 1920 Dow are still around and public today. Most were either bought out or taken private, with the remainders either being liquidated or going bankrupt. And of those six, only two have consistently paid dividends since 1920.
So perhaps the most limiting factor in replicating Coca-Cola's example is the ability to successfully pick a company that will have 90-plus years of staying power, will remain publicly traded, and will continue paying dividends over that time period.
Don't Dismiss the Possibility Just Yet
Even though you may not have psychic abilities, nor 90 years to wait, there's still a clear lesson in this example.
The lesson is that investing in companies that pay dividends can be a remarkably effective long-term investing strategy. Especially when you reinvest the dividends, thanks to the compounding effect that adds to your money's growth.
Wharton professor Jeremy Siegel's academic research backs this up. Beyond providing investors with a regular stream of income, he says that companies paying dividends typically provide their investors with the best returns -- in the long run. Even better, on average, they also do so with less risk.
So whether you're saving for retirement, saving for the college fund of a child or grandchild, or simply looking for your money to compound quicker than the 1.5% per year you'd be lucky to get with a 5-year CD -- investing in companies that pay dividends could be the better bet.
For a good place to start, check out this pair of dirt cheap stocks with huge dividends.
This article was written by Motley Fool analyst Adam J. Wiederman. He owns no shares of the companies mentioned above.