People like you can make boatloads of money, simply by investing in strong companies and holding on for long periods of time. I love pointing that out, so forgive me if you've read an article like this before.
But I promise, this article is different. It was prompted by Tim S., a reader who emailed me an amazing and inspiring story. Permit me to share it with you:
"I want to tell you about my grandfather who bought just 10 shares of Pfizer back in April 1960 at a total price of $350 and has held on ever since! He has never bought another share, but has held on through thick and thin -- and as you know, there have been very many thin years since then -- and now owns a whopping 9,100 shares (no typo!) as a result of mergers, acquisitions and stock splits. Those 9,100 shares now pay him with PFE's latest dividend increase to $1.16 per share an astounding $10,500 per year in dividends alone. By my math, this is a yield of around 3,000% which is more than any bond will ever pay, isn't it?"
More than any bond? It's more than any new investment known to man. It's phenomenal!
Crunching numbers
Let's look at Tim's tale a little more closely now. His grandfather invested $350 nearly 47 years ago --18 years after Pfizer went public -- buying 10 shares for around $35 apiece (before splits).
After 40 years of raising dividends and nine stock splits, Tim's grandfather has accumulated 9,100 shares, which each kick out $1.16 per year in dividend income. The total annual payout, then, is $10,556. In exchange for his $35 investment in each share of Pfizer stock 47 years ago, he's now receiving $1,056 per share each year. That's some payback, eh? Tim's calculations were right: He's getting an effective dividend yield of roughly 3,017%.
Those are unbelievable numbers, but remember that we're talking about a 47-year timeline here. Back when Tim's grandfather bought those shares, the Dow Jones Industrial Average was in the 600s, compared to the 12,500 or so where it sits today. Back in 1960, coal supplied 45% of our energy needs, the world's population of 3 billion was half today's level, and Harper Lee published To Kill a Mockingbird.
In other words, earning spectacular returns requires patience.
While Pfizer's story is spectacular, it's not an anomaly. Altria (NYSE:MO), for example, has posted an average annual growth rate of almost 20% since 1957.
More lessons
Tim went on to explain that his grandfather "has been a tremendous inspiration to me in my own investing career, [teaching] the value of buying a great company & and then holding on for the long, long term." He noted that his granddad began investing in 1934 and that his first purchase was five shares of Coca-Cola (NYSE:KO) stock, which have now become nearly 7,000 shares. He added:
"His main advice is that most investors simply do not hold onto stocks for a long enough period of time and allow themselves to get discouraged by the 'news' of the moment; they overreact and they sell far too soon. Take a look at all the investors who bailed out of the market in '02 when the Dow/ S&P/Nasdaq were all getting hammered. The Dow especially is up almost 65% since those lows! This has been the best advice he has ever given me and it is still so true that the 'big boys' -- and girls! -- will continue to deliver dividend increases and earnings growth for a very long time to come. Buy and hold: what a concept!"
Be like granddad
I hope by now that you want to be like Tim's granddad. If so, you need to find strong and growing companies. Look for firms that are major players in their industries and have both strong competitive positions and good growth prospects. Ideally, they'll also have ample cash and little debt, along with rising profit margins and track records of regularly and significantly hiking their dividends.
Some examples:
|
Company |
Recent |
15-Year Annualized |
|---|---|---|
|
Procter & Gamble (NYSE:PG) |
1.9% |
11% |
|
Paychex (NASDAQ:PAYX) |
2.1% |
35% |
|
General Electric (NYSE:GE) |
3.0% |
13% |
|
Wells Fargo (NYSE:WFC) |
3.1% |
16% |
|
Sysco (NYSE:SYY) |
2.1% |
20% |
We'd also love to introduce you to some promising dividend payers via our Motley Fool Income Investor service, which you can try for free for 30 days. The service's recommendations are beating the market by some 9 percentage points and recently offered an average current yield of more than 4%. Click here to learn more.
Longtime Fool contributor Selena Maranjian owns shares of Coca-Cola and General Electric. Pfizer and Coke are Motley Fool Inside Value recommendations. Sysco is an Income Investor pick. The Motley Fool is Fools writing for Fools.
