He
Dow Jones industrial average
and the
S&P 500
they have returned about 10% annually for a century. These yields mean that $ 3,000 invested in the late 1920s would be worth approximately $ 41 million today.
De Barron we took a look at the numbers because we are 100 years old. It was partly an exercise in nostalgia, but also a fascinating walk through the tangle of mergers that is American corporate history. More importantly, looking at the market for a long period of time offers lessons on how to work money.
Like investing, delving into centuries-old data is not easy. We tried to calculate 100-year returns for the indices, as well as for some prominent companies that have been trading continuously for a century.
For indices, price levels are easy. The S&P closed around 6.8 in 1920. The Dow closed that year around 72. The S&P closed 2020 at 3,756 and the Dow closed above 30,000.
This is calculated with average annual gains of 6.5% and 6.2% respectively. This is not 10%. But about 40% of total stock returns are historically in dividends. And getting a dividend list for a hundred years is hard.
For companies, calculating 100-year returns is almost impossible, even though we’ve managed it for a few. Many things happen to companies in a century, such as mergers, rotations, stock fractions, and name changes. And getting dividends for companies for a century is harder than getting them for an index.
Collecting the data basically requires examining the tables of values published in De Barron i The Wall Street Journal decades ago. The companies we started looking at didn’t help.
They include:
Another
(ticker: MO), former Philip Morris;
General Electric
(TO GIVE);
Union Pacific
(UNP); i
Honeywell International
(HON), among others. Honeywell, for example, has just celebrated its 100th anniversary of listing on the New York Stock Exchange.
However, neither Honeywell nor the exchange was able to answer the question: what is the average annual return on 100 Honeywell shares?
You really can’t blame them. A century is a long time. And Honeywell is a combination of Allied Chemical & Dye – which eventually became AlliedSignal – with the Minneapolis Honeywell Regulator Company, which eventually changed its name to Honeywell.
Allied Chemical was formed in 1920. Minneapolis Honeywell was formed in 1927. Then Allied and Honeywell merged in 1999, creating what investors now know as Honeywell International. More recently, Honeywell has derived some companies, among them
AdvanSix
(ASIX). Tracking turns is an additional headache.
In the end, De Barron found that
United States Steel
(X) has returned about 5% annually on average over the past century. GE has achieved approximately 9%. Union Pacific has outperformed the Dow slightly, by about 11%, while Altria takes the cake, returning about 15% a year.
Superior performance adds up. The ten percent annual $ 3,000 becomes $ 41 million. Fifteen percent of $ 3,000 becomes $ 3.5 billion. It seems impossible. But Altria has also come out
Mondelez
(MDLZ) i
Philip Morris International
(PMI) which together have a market capitalization of about $ 290 billion. Today it would be a very big company.
In addition, the parent company has paid nominal dividends worth millions over 100 years on the basis of an initial stake of $ 3,000.
The $ 3,000 figure was not chosen at random. That was the average household income in 1920, according to the Internal Revenue Service. Not many Americans can dedicate a year’s wages to the stock market at once, but the growth still illustrates the power of composing yields.
The power of composition is one of the most important investment lessons of the 100-year return exercise. But there are others. Growth, market share and industry structure are always important for stocks.
Demand for electricity has grown by about 4% a year on average, as many Americans read by candlelight. This boosted GE’s business.
The total number of railroad miles in the United States has not grown at all, but the freight that is sent there. In addition, it is difficult to build a competing railway from scratch. Union Pacific helped show the world the benefits of network effects (the difficulty of challenging a headline with a wide cash flow, experience, and hard-to-replicate infrastructure) decades before Google’s alphabet (GOOGL) dominated the industry of the fence.
Consumer products, including addictive ones, are usually stable investments. And commodity industries can be tough, as U.S. Steel yields point.
What is also clear is that, in the long run, dividends are huge. And even the high-growth companies of yesteryear (GE and US Steel were shares of their FAANG era) ended up paying dividends.
And that’s part of the answer to the question: How do you turn $ 3,000 into $ 41 million? Invest in the stock market, reinvest dividends and don’t touch money for 100 years.
Corrections and amplifications: If you invested $ 3,000 in the late 1920s and earned 15% a year for 100 years, it would be worth $ 3.5 billion. An earlier version of this article incorrectly said $ 3.5 trillion.
Write to Al Root at [email protected]