By: Dividend Sensei
What do you think was the most successful investment of the last 50 years? Microsoft? Apple? Some high flying biotech stock? The answer may surprise you: Altria (MO), formerly known as Phillip Morris.
Since 1968 while the S&P 500, on a total return basis (including dividend reinvestment) rose 10% CAGR, or 87 fold, Altria put up 20.6% CAGR returns, or an incredible 6,648 fold increase in value. So let’s examine how one of the most hated, and prosecuted companies in US history would up making long-term investors so incredibly rich over time.
1. Predictable cash flow business: The addictive nature of cigarettes certainly has a lot to due with Altria’s success over the past half century. However, not for the reasons you might think. In reality it’s the consistent free cash flow that cigarettes represents that allowed Altria to grow its dividend over time that is the real secret to its success.
2. Dividend growth is king: While some people may think that Altria’s amazing success of 50 years was largely due to earlier tobacco sales, before American society shifted away from tolerating smoking, and it wound up settling with the state’s Attorney’s General for $206 billion, in fact this isn’t true.
For example, if you had invested $10,000 in Altria on Jan 1, 1995, you would have still generated 18.1% CAGR total returns vs the market’s 8.2%. What’s the secret? The dividends, or more specifically the hyper compounding nature of dividend reinvestment.
For example, that initial $10,000 would have bought you 416 shares at a starting price of $24.04. However, today, thanks to the magic of a steadily growing dividend buying more shares over time, (and resulting in an exponentially growing stream of cash buying more and more shares) you would have 5,346 shares, each one worth $64.38.
In other words, dividend reinvestment, itself a form of dollar cost averaging, grew your share count by 12.9% per year, and generated 71.2% of the total gains from the investment.
3. Buy the dips if you want to be rich: Dividend reinvestment is just another way of saying “dollar cost averaging” in which you periodically buy more shares over time, no matter what the price is doing.
The big reason that Altria managed to do so well, both over 21 years, and 48? Not in spite of the dips, but BECAUSE of them. When the states were gunning for industry and it seemed like big tobacco might not survive? That was a great time to buy, and if you owned Altria and had a dividend reinvestment plan, or DRIP turned on? Well then you benefited from this. The same occurred in the Nasdaq crash of 2000-2003, including 9/11, and the 2008-2009 meltdown.
In other words, it wasn’t anything necessarily that Altria as a company did that made its investors rich, it was the investors themselves turning off their emotions and putting their portfolio on autopilot.
4. The magic of time: At the end of the day the biggest secret to getting rich in the stock market is no secret at all; it’s the power of compound interest.
What Albert Einstein called the 8th wonder of the world is the most valuable tool you have to reaching your financial dreams. Compound interest is merely your money compounding over time, by achieving a certain total return (more assured if it’s a dividend growth stock, which has the hyper compounding effects of rising dividends, and dividend reinvestment as a built in growth catalyst), and your profits having profit babies, that have even more babies, ect.
The human mind didn’t evolve to comprehend the power of exponential growth, so many people end up sabotaging themselves by selling to early, failing to comprehend just how much they might be giving up down the road.
In other words, at the end of the day, it matters less that you buy the perfect stock, and more that you patiently wait for the hyper compounding magic of growing dividends, and the dollar cost averaging (buy the dips) effects of dividend reinvestment to do all the heavy lifting for you.
At the end of the day, over the past 50 years, a big, bad, boring old blue chip tobacco stock beat all the hyper growth “sexy” stocks. But it wasn’t necessarily anything that the company did that is what made it so spectacular, but investors being smart (or lazy) enough to just sit back, and watch the dividend trickle grow into a stream, then a river, and finally an unstoppable tide.