I wanted to start a new series of posts to show the reader the power of investing in dividend growth stocks. About once a month I plan on picking a company that would be considered a good investment for dividend growth investors and run a back test to determine what your results would be had you invested in the company 10 or 20 years earlier and held through today. For my first company to review, I chose one of the most popular companies to invest in, Coca Cola (KO).
A History of Coca Cola
Coca Cola is a beverage company who has been paying a quarterly dividend to investors ever since the year 1920. They have been increasing that dividend payment each year for the past 50 years. If you are looking for a dividend growth stock, this might be a good one to check out.
Coca Cola began in 1886 when an Atlanta pharmacist mixed up a drink concoction and began selling it at a local drug store. Coca Cola quickly grew throughout the early years of the 20th century becoming one of the most popular refreshment drinks around. Through the early part of the century Coca Cola quickly began expanding not just in the United States but around the world. They began setting up syrup manufacturing plants and bottling plants across the globe introducing the iconic symbol of refreshment almost everywhere.
After 70 years of success with just the Coca Cola brand, the company began expanding with new flavors. They introduced Fanta, Sprite, Fresca and purchased the Minute Maid juice company. Today Coca Cola offers over 3,500 different beverages. From the beginning days when just 9 drinks were sold a day, Coca Cola has expanding to selling around 1.7 billion beverages a day in the present. The company has been around for 126 years and operates in over 200 countries around the world. If your looking for a successful company then you need look no further than the Coca Cola Company.
A 10 Year Investment in Coca Cola
Let’s take a look and see how you would have fared if you invested $5,000 in Coca Cola stock exactly 10 years ago. On October 25, 2002 you would have been able to purchase roughly 106 shares of Coca Cola for $4,979 at a closing price of $46.97. Since that date there was a 2 for 1 stock split so you would now own 212 shares of KO. The most recent closing price of KO was October 26, 2012 when KO closed at $37.04. Today your 212 shares would be worth roughly $7,852.48 for a return of 57.7% or a compound annual growth rate of 4.66%.
While that may not sound like that great of a return, lets not forget about the dividends you would have received during those 10 years as well. Over the course of the past 10 years you would have received a total of $1,531.15 in dividend income. This means that your total return over the past decade of owning Coca Cola stock has been 88.47% or 6.54% compounded annually.
So over the past decade while owning Coca Cola shares you have enjoyed a 6.54% compounded annual return. You have been paid in cash dividends $1,531.15. You could have used that dividend income to help with some of your expenses such as groceries or utility bills. Or you could have reinvested those dividend payments and your total return would have been even better.
A 20 Year Investment in Coca Cola
An investment in Coca Cola 10 years ago would have turned out fairly well. How about 20 years ago? Lets take a look at how you would have fared had you invested $5,000 in Coca Cola stock 20 years ago. On October 26, 1992, KO stock closed with a price of $40.75. You would have been able to buy 122 shares for a total price of $4,971.50. Since that date there have been two 2 for 1 stock splits. Today you would have a total of 488 shares worth a total value of $18,075.52. This would give you a return of 263% or 6.67% compounded annually.
Once again don’t forget about all the dividend income you would have received over the past 20 years by just owning your Coca Cola shares. Over the past 20 years you would have received a total of $4,799.48 in dividend income from Coca Cola. This means that your total return over the past 2 decades of owning Coke stock has been 360% or 7.93% compounded annually.
So a 20 year investment in Coke earned you a total return of 7.93% compounded annually. You would have received $4,799.48 in dividend income to either offset your expenses or reinvest in the company. Had you reinvested in more Coke stock your returns would have been even better.
While an investment in Coca Cola may not seem like a home run with less than a 10% compounded annual return, you must look at it in context. You have enjoyed a very nice return over 10 or 20 years while owning one of the most well established beverage companies in the world. This company has shown a commitment to paying increasing dividends over the past 50 years. You can count on Coca Cola to continue into the future leading the beverage industry and returning profits to shareholders with dividend income. I like Coca Cola because I don’t see any way that people will not still be drinking their brands many many years into the future.
Disclosure: I am long KO.