KO dividend (Coca-Cola Company) -
Case Study

This KO dividend (Coca-Cola Co) case study is designed to highlight the enormous rewards that great companies can give you over long periods of time. 

It doesn't matter if the company is large or small, if it can sustain consistently high returns on invested capital and you buy the stock at a reasonable price then the chances of a good outcome for you are very good. This is precisely the story with the KO dividend. 

Big companies can offer great returns

In the case studies we have looked at so far on Johnson & JohnsonDisney, and Unilever we have shown that performing well in investing doesn't necessarily meaning unearthing the next super company that no one has heard of. Often it is staring you in the face. The key is to act when you see a good deal. 

Coca-Cola hit some trouble in the 1980s. Its market share was falling and it was consistently polling behind its arch rival Pepsi in taste tests and management saw this a threat to the company. 

In response, they brought out "New Coke" which was designed to improve the taste of Coke. The experiment backfired! Management had failed to appreciate the strength of the old Coke brand and the affinity consumers had to it. "Old Coke" was brought back. 

In late 1987 Coca-Cola was trading with a price/earnings ratio around 15. By then of course, it already had a terrific track record of growing earnings, cashflow, and dividends. 

In fact, the KO dividend has been as solid as a rock, paying out every year since 1920 and by 1988 had just become a dividend aristocrat having raised its dividend every year since 1962. 

Imagine you bought Coca-Cola shares in 1988...

It's January 4th 1988, and you have $50,000 to invest. You decide to purchase stock in Coca-Cola.

That day, it was trading at $38.38 so you ended up purchasing 1,302 shares (we're ignoring brokerage costs here). 

Now let's imagine that you just forgot about them and went about your life. How would your investment look by the end of 2016?

Firstly, let's see how many shares you would have today. For that, we need to have a look at the stock splits through the years:

Jan 4th 1988:  
May 1st 1990:   
May 1st 1992:   
May 1st 1996:
July 27th 2012: 

Purchase 1,302 shares
2 for 1 stock split
2 for 1 stock split
2 for 1 stock split
2 for 1 stock split

Resulting number of shares

On the last trading day of 2016, the shares closed at $41.46 meaning your original $50,000 investment had turned into $863,695! This equates to a compound annual growth rate of 10.7% per year. 

But, we have forgotten those wonderful KO dividends!

When you bought the stock in 1988, the yield was around 3% but Coca-Cola has consistently raised its dividend. 

The KO dividend has been more generous dividend than Disney through the years, so the dividend has made a bigger difference. 

Since 1988, you would have received the equivalent in today's shares of $15.635 per share in dividends alone. This means you have received $325,708.32 of cash from your original $50,000 investment. I'd take that!

Today, your 20,832 shares would be producing $29,165 PER YEAR and we'd expect that to keep growing. 

This means that 28 years after you made your investment, you'd be getting 60% of your original money back PER YEAR! This is why we urge you to find great companies and then just be patient. 

As Warren Buffett says "time is the friend of the wonderful business."

What if you had reinvested your KO dividends?

Up to now we've assumed you have just spent the dividend income you've received. 

The results would have been even better if you had re-invested your dividends back into Coke shares. 

Today you would have around 38,590 shares and your investment would be worth around $1.60 million! This works out to a compound annual growth rate of 13.17% per year. What's more, you'd be receiving a cash dividend of around $54,000 PER YEAR meaning you get more than your original investment back every year!

So while most people shun companies like Coke, Johnson & JohnsonDisney, and Unilever as they are seen as big and boring, our case studies have shown that great companies like these are quietly making their owners very rich. 

Coca-Cola has consistently shown returns on equity of above 20% (its lowest rate this decade was 22%) and very often above 30%. These returns on equity give you a great chance of investing success. 

You do have to be patient but all of the companies studied have produced excellent average returns over decades. Of course, these sort of returns may not happen in the future but, as we've seen from our case studies, it only takes a couple of really good ideas to more than compensate for under-performers in your portfolio. 

It comes back to what we said on our page on {compound interest} that you need high returns re-invested for as long a time as you can. If you can do this, then the odds are that you will become very wealthy. 

You can find more informmation on Coca-Cola and KO dividends on the investor relations page at www.coca-colacompany.com/investors

Mike - six-figure dividend earner

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