This month, we analyze the returns of top-performing stocks over the past few decades with and without dividends. The catch? If you have the will to hold on for the second decade, your returns will be staggering.
This is Greg Denewiler, and you are listening to another episode of the Dividend Mailbox, a podcast about dividend growth. Our goal is to stuff your mailbox full of dividend checks and make each year’s check larger than the last.
In this episode, we are going to examine just how much dividends can add to stock returns. I’ve already mentioned in a previous episode the example of S&P global where they looked at $136 invested in 1980 and how it grew to $10,500 with dividends reinvested. But only $3700 if you just consider the price. Let us now consider some individual stocks and just how much dividends come to play. According to Kiplinger, the number one performer for the past fifty years ending in 2019 is Berkshire Hathaway with a 19.8% annualized return. If you had invested $10,000 in 1969, it would now be worth $83 million. So, if you look at the top 25 list for the past fifty years, Berkshire Hathaway is the only one that doesn’t pay a dividend. But before we look at number two, I want to present you with a scenario, that in 1969, you already knew that the company was going to be sued by all 50 states. That their market share would decline for the next fifty years. It’s probably going to be the most politically incorrect company you can own. And just to mention, their product kills you. So how much do you want to put in this company in 1969? Well, the second-best performer is Altria, otherwise known as Phillip Morris. Their main product is Marlboro and it’s a tobacco company. Well, $10,000 invested in 1969 has grown to $1.5 million if you just consider the price. But if you add in the reinvested dividends and the spin-offs that they have done in the last fifty years, your account value is now up to $52 million, which is a significant difference. So, let’s just look at a little bit of the history of Philip Morris. They acquired Kraft, had a four-for-one and a three-for-one stock split, and then spun off Kraft in 2007. Kraft shareholders then received Ralcorp and Mondelez while Ralcorp shareholders received Post holdings, which is the cereal company. Altria also spun off Philip Morris international. If you didn’t sell a share and kept all of the spin-offs, you now own a total of 65 shares (not counting reinvested shares). Assuming an average dividend yield of the current shares that you own of 4.4%, you would be receiving annual dividends of over $2 million. Now you have to keep in mind that if you put $10,000 in the S&P 500 for the same period, the total value (even including reinvested dividends) would be less than $2 million. So, you might be thinking, “well what if I didn’t want to own a tobacco stock?” Well, number eight on the list was VF Corp. VF Corp owned, for most of the century, Wrangler jeans. They own North Face, Vans. Basically, they are a clothing brand company and it’s a somewhat simple business. $10,000 invested there would have grown to $2.2 million or 11.5% annualized. With dividends reinvested, the return climbs to 15%. That increases your return to $11 million. So, in 1986, which is basically as far back as my data goes back for dividends, VF Corp had a dividend yield of 1.9%. Now, 1.9% in the mid-80s was nothing spectacular. In fact, the dividend yield for the S&P 500 was a little bit higher than that, so you sure didn’t buy VF Corp just purely for the dividend. But the effect on your return was dramatic— the difference between $2 million and $11 million. So, you might be saying, “well I don’t have fifty years, how does this help me?” Well, before we move on, let’s look at number 19 on the fifty-year list, which was Holly Frontier and it’s a refiner. Price appreciation without dividends was 11%, with dividends, its 14% annualized. The difference to your return went from having $2 million to $7 million. But you have to remember, the increased return just grew by 30% (from 11% to 14%), but the return in your account grew by 250% due to the reinvested dividends. Now when we go to the 20-year list, Holly Frontier shows up again, and it's number 9. So $10,000, if you invested in Holly Corp in 2001, without dividends it grows to $150,000, with dividends it's $280,000, or almost double. And there again you’re looking at a return that went from 14% to 18%, only about a 30% gain in return. Again, let's look at in 2001, the dividend yield on Holly was 2.1%. It's roughly where the S&P 500 was, from a dividend yield standpoint, just a little bit higher. So, you weren’t buying Holly strictly for the dividend, you were looking at it from a total company perspective. So, it's not exactly exciting looking at a 2.1% but it sure made your account value exciting after 20 years. Now if 20 years is still too long, let’s look at ten years. Now when we get to the ten-year list, only about half the stocks pay dividends. But the number two performer, on the ten-year list, was Domino’s pizza, which happens to be a dividend payer. So, it’s a great example that to be a top-performing company, dividends are not boring. Now just from a “for your information” standpoint, the number two stock for thirty years and, also on the list for twenty, years as the number one performing stock was Monster Beverage. This is basically a high caffeine drink, and it’s another example I think— it doesn’t pay a dividend– but it’s a good example that you don’t have to be in high tech to make a lot of money. But now, you may be thinking “well I have to get lucky and own one of these top performers to really have a good return.” But that is actually not true. It just takes time. If you hold something for twenty years, you can produce great returns if you have the compounding effect. And you can achieve dramatic results just by managing your portfolio for long-term dividend growth. Here are a few ways that will create what I am going to call “The Second Decade Effect,” which is where dividend growth starts to compound creating exponential growth. You earn interest on interest and your reinvested interest into more dividend payers also creates growth, and that is where the magic starts to happen. So first of all, one of the ways is just looking at companies that grow their dividend annually. That is going to grow your dividend income. It’s the core of what we are trying to accomplish here and it’s the foundation that creates income growth. Number two, just look at reinvesting your dividends. You don’t have to buy the same company each time. You can diversify into more dividend payers with your dividend income and create a more diversified portfolio. The reality is they are not all going to be top twenty-five dividend stars. But the great news is, they don’t have to be. Number three, you can reallocate assets, and given some time, this is where you can really dramatically improve income with just a simple movement of your assets. Let’s assume that you purchased Microsoft 15 years ago and it had a dividend yield of 3%. Well, because the stock has performed so well, now the current yield is less than 1%. So, if you sold part or all of your position and reinvested it into another company that had a 2% dividend, right there you have doubled your income. So, these three, what I’ll call “levers” for dividend growth all come into play after you have held your portfolio for several years. It just takes time for compounding to work. Just remember that dividend growers also have to be growth stocks. Because in order for the dividend to grow, the earnings have to grow long-term. So, it’s the only way that they can accomplish long-term dividend growth. You may be thinking that these illustrations don’t include the outstanding returns from some of the big growth stocks like Amazon, Netflix, Facebook, and others. Well, you’re right. However, part of that list includes Microsoft and Apple, which are dividend growers and fit the model perfectly. You also must remember that this is a strategy, and it is not going to be the best strategy all the time. But it is the strategy that grows your income over time. Next episode, we will look at the penny story. It is a great illustration as to how compounding works and also the discipline that it takes. And in the end, it’s a mindset, and you have to have it from day one.
If you liked today’s podcast, please leave us a review and follow us on LinkedIn, Instagram, and Facebook. If you would like more information regarding dividend growth, or just our style of investing, go to growmydollar.com. There you will find previous podcasts, and also our monthly newsletter. Past performance does not guarantee future results. Each investor should consider whether a strategy is right for them and consider all the risk involved. Dividend stocks are volatile and can lose money.