For obvious reasons, historical case studies based on a single lump-sum investment are not ideal. For one, the assumption that folks in their twenties or thirties have access to significant capital is not a great one. Absent inheritances or gifts, most folks save as they earn. Also, assuming somebody’s goal in life is to simply accumulate wealth for a prolonged multi-decade stretch is a poor one. Most people actually want to deploy the fruits of their savings rather than be the richest old-timer around.
On that note, let us depart from the usual method of measuring investing ‘success’. Instead of assuming that you had a big chunk of change laying around, let’s imagine you spent the last decade signed up to Procter & Gamble’s (PG) direct stock purchase plan instead. Picture this scenario: at the start of the 2010s you commit to deploying $500 each month from your paycheck to purchasing fresh Procter & Gamble stock. On top of that, you check the box to automatically reinvest cash dividends at whatever the prevailing market price is on the dividend pay date.
Furthermore, as each year closes out, you decide to bump up the monthly payments in the next year by $100. You figure that your rate of savings should reflect the fact that income tends to rise with age. That means you would be deploying $600 per month in 2011, rising to $700 per month in 2012, $800 per month in 2013, and so on. You decide to commit to this pattern for an initial period of ten years, so that by 2019 you end up spending $1,400 each month purchasing extra shares of Procter & Gamble stock.
Regular Investment Plan
As you enter the 2020s here is what you see when you check your progress. In total, you spent $114,000 from your post-tax income buying just over 1,410 shares of Procter & Gamble stock. Your weighted-average purchase price over the decade was just over $80 per share, or some $42 below the current market price.
In addition, the company pumped out almost $25 per share in dividend cash between 2010 and 2019. Assuming you reinvested those along the way, you would have collected an additional 220 shares. All said and done, the value of your Procter & Gamble stock would currently sit at circa $200,000.
This year, I expect the stock to pump out somewhere in the region of $3.05 per share in cash dividends. With your 1,630 shares, that gives you a potential annual income stream of around $5,000 before tax. Furthermore, even if you never invested another dime into additional stock, whether that be via reinvested dividends and/or fresh capital, that income stream should continue to grow ahead of inflation.
A few extra thoughts. First, I deliberately chose Procter & Gamble stock because it has had an unremarkable decade. For a variety of reasons – namely business maturity, a strong US dollar, and some secular headwinds – underlying dividend growth has been quite low recently. To be more precise, I have average annual dividend growth at 4.85% between 2010 and 2019.
Second, the time period of ten years is not especially long. I mean, the average holding period for stocks was around eight years back in the 1960s. That had collapsed to around one year by the turn of the millennium. Only by modern standards does a decade qualify as long-term investing. Finally, the monthly commitments are not particularly aggressive. Averaged across the ten-year period it represents a savings rate of circa 20% based on the average US household income.
Despite the above, you ended the decade with a growing income machine pumping out $1,250 in quarterly dividend cash. Is it a life-changing result? No, probably not. Then again nobody this side of the millenium expected to get rich off a ten-year investment in Procter & Gamble stock. That was also never the goal you set yourself. You wanted to realize tangible benefits to your disciplined savings plan. On that basis, having an extra $5,000 per annum to put towards vacations, home improvements or whatever life-enhancing endeavors you wish to pursue strikes me as a good outcome.
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