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 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.