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Friday, 10 August 2012

If only you had purchased Coca-Cola shares in 1962

Imagine going through life planting financial seeds like this example posted below every year, through crashes and bubbles.  You would reach the end of your retirement with an overflow of riches, with assets generating plenty of dividends, interest, and rents into your bank accounts to spend, save, give to charity, or fund new investments.

Imagine it is halfway through 1962 and you were about to start a business.  You have $10,000 in savings but later decide you don’t want to operate your own company.  Instead, you establish a tax-sheltered trust and invest the money in shares of The Coca-Cola Company at $76.50 per share.  This resulted in a total of 131 shares.

The stock is ignored for the past 50 years and the cash dividends pile up in a savings account without being reinvested, generating no interest income.  You never add to the position.  You never make a withdrawal from the trust.  Like a seed planted in the forest and left to nature, you walk away and forget about it.
What happened over that half century?  How much money would be in the account as a result of ownership in Coca-Cola?

Today, the tax-sheltered trust would have $613,214 in it, for a gain of 6,232%.  This would consist of $486,943 in shares of The Coca-Cola Company (the 131 shares would have grown to 6,288 due to stock splits* with a current market price of $77.44 per share) and there would be $136,271 in cash in the savings account that has been sitting there, unused.
In 1962, $10,000 in savings would be the equivalent of roughly $73,000 today.  That means the real, after-inflation profit would be $540,214.  In essence, every $1.00 put to work 50 years ago would be worth $8.40 in purchasing power as of today.  It is purchasing power that should be your focus.  The results would have been worse if the stock was held in a non-tax advantaged brokerage account.  The results would have been significantly better were dividends reinvested.

Considering that you, in this scenario would have never had to think about Coke, do a single hour of work beyond the first investment, or add to the position, such a decision would have been successful. You could have gone about your life and made other investments over time, with the new savings generated by your employment.

* Footnote: History of Coca-Cola stock splits during this time period: On June 1st, 1977, the shares split 2-1, turning into 262 shares.  On July 1st, 1986, they split 3-1, turning into 786 shares.  On May 14th, 1990, they split 2-1, turning into 1,572 shares.  On May 12th, 1992, they split 2-1, turning into 3,144 shares.  On May 13th, 1996, they split 2-1, turning into 6,288 shares.

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