Building Wealth With Dividend Investing: The Coca-Cola Example

One of the arguments that is often made about dividend growth investing is that it takes too long to create enough wealth to be a useful strategy for most investors. The argument goes that dividends won’t provide the income that an investor needs when it’s time to retire. I’ve never bought this argument as I firmly believe that investors can indeed get rich with dividends.

Every investor is in their own unique situation. Perhaps you are multiple decades away from retiring or maybe you are nearing the end of your working years. Maybe you are very risk adverse when it comes to investing, having lived through the most recent recession or maybe you don’t mind chasing high-growth stocks. Perhaps you have plenty of capital to invest or maybe are limited in what you can save. In any case, it is very likely that dividend growth investing can help you accomplish your retirement goals.

Let’s look at how one can become rich through dividend growth investing by using Coca-Cola (KO, Financial) as an example. Coke is hardly a sexy stock, but the company has increased its dividend for the past 56 years and is well-known by dividend growth investors. Many respected investors, such as Warren Buffett (Trades, Portfolio), have large positions in the company. While the average income orientated investor likely knows Coke’s story and has the stock in their portfolio, very few would argue that the company is a growth machine. This makes it a perfect example of how dividend growth investing can provide wealth and income.

We will run several different scenarios and use several different inputs in a dividend investment calculator to see how a position in Coke would look over a number of years. In all of the scenarios we will use the following constant inputs unless otherwise noted:

• Initial investment: $1,000.
• Assumed dividend growth rate: 7% (slightly below Coke’s 10-year average growth rate of 7.9%).
• Assumed dividend yield: 3% (Coke’s average dividend yield over the last decade).
• Assumed inflation rate: 2%.
• Assumed growth rate of share price: 5%.

The inputs that will change is the length and size of the investment. All values listed are adjusted for inflation.

Scenario 1: Young investor, long time horizon, small investment amount

In the first scenario, the investor is in their early 30s. They have at least 30 years until retirement so they will automatically reinvest their dividends into new shares. Once hitting retirement, this person hopes to withdraw just the dividend income and use that for retirement expenses. This is the classic case that many think of when they hear the phrase “dividend growth investor.”

The young investor has only a finite amount of capital, so after making a $1,000 investment, they are only able to add $100 a month to their position in Coke going forward. Let’s say for the sake of argument that the investor has found a way to invest without paying trading fees. The initial investment would purchase a bit more than twenty-one shares of Coke based on Monday’s closing price of $46.48. The company will pay out $1.56 in dividends during the first year. This equates to $32.76 in dividends for year one. Free money is nice, but this isn’t a life changing amount, at least not yet.

Let’s say that the investor continues to contribute $100 a month and just keeps reinvesting those dividends. After 10 years, the investor’s position in Coke is now worth $17,046.64. The holding is also throwing off $605.49 in dividends. This may not seem like much, but watch how both the portfolio value and the dividend stream increase as more time passes.

After 20 years, a total of investment of $25,000, the value of the investor’s Coke holding is now worth $46,329.09. The income from this investment is now totaling $1,987.30 per year.

After three decades of working, the investor is now wondering if they can retire. When they check their brokerage account, they see that their total investment of $37,000 in Coke now has a value of $109,233.12 and produces $5,658.61 in annual income. That means that if there are no more contributions and all dividends are taken in cash, the investor will receive more than $1,400 every quarter for as long as they hold all of their shares in Coke. And this is just from one position.

Scenario 2: Shorter time horizon, higher savings rate

While having a 30-year time horizon is great, not every investor has this luxury. In this scenario, the investor, in their late 40s and early 50s, is tired of paying the management fees associated with mutual funds and decided to handle their own investments. The last recession caused the value of their portfolio to decline by almost half. That being the case, they are slightly more risk adverse and they want to own shares of a “safe” company, a label many investors would likely place on Coke. This investor has 10 to 15 years to retire.

While their time horizon is shorter than in Scenario 1, they have more capital to invest, let’s say $500 per month. The initial investment of $1,000 remains the same. After five years and a $31,000 investment, the holding is valued at $34,747.23 and provides $868 in dividends.

At the end of year 10, the $61,000 investment in Coke is now worth $77,901.65. This single position now produces $2,380 in income each year.

Fifteen years later, the investor is ready to retire and finds that their $91,000 investment in Coke has grown to $135,886.20 while providing $5,304 in dividends every year.

Even with a shorter time horizon, this investor created a sizeable income stream position for themselves.

Scenario 3: Long time horizon, high savings rate

In this scenario, the investor has thirty years to retirement and is able to invest $300 per month into their Coke position after their original $1,000 purchase. This would be the “best of both worlds” type situation in that the investment time frame is longer and the investor is able to put away more money per month.

After ten years and $37,000 worth of stock purchases, the positon is worth $47,474.15 all the while throwing off $1,450 in dividends per year.

At the twenty-year mark, the investor has turned a $73,000 investment into $131,814.88. In addition, Coke’s shares are now producing $5,654 in income.

After thirty years and $109,000 in investments Coke, the investor is now sitting on a position value of more than $312,516.39. For the investor who is looking to live off the dividends from their portfolio, this isn’t even the best part. After three decades of working and saving and buying monthly allotments of Coca-Cola, the investor now receives $16,189.31 dividends every year. Every three months, Coke will send the investor more than $4,000 in cash.

Again, this is just from a single position. Imagine the income the portfolio could produce if the investor has four or five holdings like this. What if they had ten or twenty? Add this values up and this investor likely has a retirement that is paid for entirely on dividends.

Final thoughts

We’ve looked at three scenarios and all three show how dividend growth investing can help create wealth and income for an investor. Even if your available capital to invest is limited or you’re nearing retirement, investing in companies with rising dividends can help you reach your goals. In each of these scenario, we kept many of the inputs constant.

That is likely not the case in real time as the inputs will likely fluctuate from year to year. Perhaps Coke’s share price increases it a slower rate or the dividend grows at a faster than we anticipated. The point is, that in each of these three scenarios, the investor was able to turn an investment into a very large position that created income.

Ideally, you are able to invest high amounts of capital over a long period of time, but if that isn’t the case, that doesn’t mean you can’t become wealthy or create income through dividend growth investing. Successful investing could be as easy as finding and developing several positions like we did in our hypothetical scenarios with Coca-Cola.

Disclosure: I am not long any of the stocks mentioned in this article.

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