When I was 12 years old, I heard something that introduced me to stocks, drove home the awesome power of investing, and changed my future. You see, someone explained to me then that everyday people -- just like you and me -- could become owners in virtually all of the everyday businesses that made the everyday products involved in our everyday lives.
He said I could become an owner in Coca-Cola (NYSE: KO ) , and profit -- if ever so slightly -- from every single can of soda the company sold. He said I could buy Gillette (now part of Procter & Gamble (NYSE: PG ) ) and get a piece of the action every time someone shaved a whisker. With Johnson & Johnson (NYSE: JNJ ) , he said I could make a few cents every time one of my friends covered a scrape with a Band-Aid or took a Tylenol.
That someone was my father, a man of incalculable goodness who, ironically, didn't own any stock at the time but spent all the days of his life working to ensure that I would own some. I do, and I cherish that gift -- as well as all the others he gave me -- along with my memories of him.
A new dawn
Dad taught me what I've since considered the most beautiful thing about investing: Some companies pay a dividend. It still sends my pulse racing when I think about it.
At that point, I realized that, not only could I profit from those cans of soda 50 years from now, but I could do so every three months -- when dividends are typically paid. More importantly, I could profit in the form of a slight but very real check with my name printed in big bold letters right across the front.
As far as I was concerned, Willie Morris could keep his dog Skip, because I had discovered a very good friend that didn't soil the rug. This delightful concept had been completely foreign to me, but I found it incredibly enticing. If I worked hard now, saved my money, and invested it wisely in companies like these, one day I would no longer have to work. I could instead sit back and cash my dividend checks. How sweet it is.
To a kid who up until then believed he would be a working stiff until age 65 -- and the only income he would ever see was a salary, a pension, and maybe, just maybe, a Social Security check -- this was a heck of a concept.
Who would have thought a snot-nosed, freckle-faced, gangly kid could become an owner in a business and earn income from that business without having to lift a finger to run it? In fact, I could ultimately earn income from a vast number of businesses in which I would never have to be directly involved. I wouldn't have to stand behind the counter and ring the first sale. Now you're talking.
I immediately began to run the numbers and figure out how many shares I would have to own to generate enough dough to fund baseball card and bicycle purchases for the next 40 years. Then I set about developing a plan to make it happen. Now, it wasn't enough for me to simply hear about a few companies that paid a dividend and leave it at that. Oh, no, ma'am. I had to see some proof that this approach would actually turn a relatively modest start into a big finish. As such, I learned all that I could and began to run the numbers to determine what my investment might look like in the future.
Basically, I selected three companies, all with long histories of paying material dividends and a flair for increasing those payouts. I figured this would result in the best of all worlds for my mock portfolio. First, I chose Altria (NYSE: MO ) -- then Philip Morris -- as it was the most venerable dividend payer of my time. I then selected PepsiCo (NYSE: PEP ) -- to the shame of my family, I preferred Pepsi over Coke, and the firm's ownership of Frito Lay sealed the deal. Lastly, I added Johnson & Johnson -- my friends were total klutzes and I figured I'd be rich in no time.
After making the selections, I went back in time and assumed that I'd made a $1,000 investment approximately 25 years before. I then did my best to determine the current value of that investment. What follows are updated versions of what I came up with, using the same three companies.
If you'd invested $1,000 in Altria in 1980 and reinvested your dividends along the way, today you'd be sitting on shares worth about $155,000. Without dividends, you'd have a puny $50,000. Though back then you would have begun with a measly 29 shares of stock, you would now hold more than 2,180 shares through reinvested dividends and stock splits.
That's not bad, but here's the payoff pitch: From that single $1,000 investment, your shares would now provide an annual income of nearly $7,000! Twenty-five years may seem a long time, but consider that you would have begun receiving your $1,000 original investment paid out to you annually in dividends in little more than 10 years.
If you'd sunk your $1,000 into PepsiCo shares in 1980, you'd now have $75,115 with dividends reinvested. Without dividends you'd be facing just $39,655. Though impressive, you might be wondering why that figure is so much lower than Altria's total. The answer largely comes down to dividend yield. PepsiCo had an average yield of about 2% during the period in question, while Altria averaged about 5%. Thus, the higher the yield, the greater the benefit provided by dividend reinvestment. Though you would have begun with about 41 shares of PepsiCo, through reinvested dividends and stock splits you would have ended with nearly 1,400. Not bad, but again, consider that on your single $1,000 initial investment, your PepsiCo shares would now provide an annual income of nearly $1,400!
If you bought into the Band-Aid argument, $1,000 invested in Johnson & Johnson in 1980 would be worth $65,500 today with reinvested dividends. Without dividends, you'd have a less satisfying $39,121. Though you would have begun with a tiny 13 shares of stock, through reinvested dividends and stock splits you would now have nearly 1,050 shares. Again, pretty impressive, but get ready for another income boost, as today your shares would pay you almost $1,400 annually!
Thus, if you had purchased all three companies, making a total investment of just $3,000 in 1980, today you'd be sitting on a portfolio worth nearly $300,000 that provided an annual income of nearly $10,000. The income alone is more than three times your original investment, and that's the power that comes from choosing dividends.
The Foolish bottom line
The result of that long-ago lesson is that I'm here writing for you today. It's also why I now share my best ideas for fulfilling this dividend-oriented strategy with my subscribers every month in the pages of Motley Fool Income Investor.
I developed and pitched the concept of a dividend-stock newsletter because I believe in the strategy and practice it myself. It's how I invest, largely how my family invests, and it's how my friends tell me that they invest in order to avoid further badgering.
Of course, I'm still developing my own dividend plan a little bit every day. After all, this can be a lifetime pursuit for someone with a relatively modest beginning. The strategy already results in significant income in my coffers quarter after quarter -- not enough for my fairly aggressive retirement needs, mind you, but then again, I have no plans to retire from this job that I love.
In fairness, I've since come to realize that finding these businesses can -- in itself -- be a full-time job, but that's why I'm here, and I believe that's why you're here, too. Dividend investing just plain outperforms with lower risk, and that's a compelling trait that all investors can understand.
This article was originally published on March 14, 2005. It has been updated.
Mathew Emmertis a master at making duck calls. In case you didn't notice the marketing, he's also the author ofMotley Fool Income Investor. He owns shares of Altria and PepsiCo. Coca-Cola is a Motley Fool Inside Value recommendation. The Fool has adisclosure policy.