coca cola stockI 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.

Conclusion

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.

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6 Responses to An Investment in Coca Cola

  1. Great post! I do think KO is top dollar and not a value stock, and some say its overvalued. On the other hand I still think its a great company to own regardless of price, if you have a long term view.

    I just added another 30 shares to KO today, and bought 50 shares of MCD as well. Does it get any better than that?

    Cheers
    The Dividend Ninja

    • Dan Mac says:

      Thanks Dividend Ninja. Valuation is one thing I didn’t take into consideration when writing this article. I believe valuation when making a purchase is one of the most important things to pay attention to. If you are way over paying for a company then you can’t expect great results going forward. See those who purchased stocks such as MSFT and WMT back in 2000 or so. They would complain about the stock price going no where the past decade but yet they way overpaid in the first place. However there are times when stocks offer amazing valuations, such as the last recession in 2008, when you could back up the truck and load up on shares and you would be doing wonderful now and many years into the future.

      I do agree there are some companies that are great to own regardless of price such as MCD and KO. They’d have to get pretty grossly overvalued before I’d consider cashing in. In the meantime I’m happy owning those companies forever and seeing steady returns over the long run.

  2. Rob says:

    Hi Dan,

    Nice article. Up until now I’ve only invested in Canadian dividend stocks, but I’m getting ready to take the plunge to invest south of the border. I’ve been looking at KO for a while, but was a little unsure on the 2.75% dividend. Thanks for showing how the total return plays out. Looking forward to reading the next post in your series.

    • Dan Mac says:

      Thanks Rob,

      I mainly focus on US stocks since I’m from the US. It seems there are quite a few dividend investors located in Canada so I may need to start looking into Canadian companies as well or miss out on some great opportunities!

      As for KO, I believe it’s a great company and will continue so well into the future. The 2.75% div yield is a little lower than most dividend investors would like. It’s a personal decision as to how low of a yield is considered too low for your own portfolio. I consider any stocks that yield at least 2.5% while I know others that want at least 3.5%. That doesn’t make either of us right or wrong, just different preferences for our own portfolios. In this article I didn’t take a look at KO’s valuation so I would make sure you dig into that before deciding whether to buy at this time or not. Even great companies can underperform if you over pay for them!

  3. [...] An Investment in Coca Cola @ Dividend Growth Investing [...]

  4. [...] Another solid business to own is Coca-Cola (KO), and it’s also a favourite among dividend investors. Although it has a lower yield at 2.75%, it is one of those stocks that just keeps moving higher. Coca-Cola has had continuous and stable growth since March 2009, soaring from $19.55 per share (split adjusted) to a high of $40.42 on July 30th, 2012. In 3 ½ years, the price of KO had doubled, with its current price at $37.08 per share. Dan Mac recently wrote why he thinks KO is a good investment, in An Investment in Coca-Cola. [...]

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