Dow Jones Industrial Average
and
S&P 500
they returned about 10% a year for a century. These results mean that $ 3,000 invested in the late 1920s would be worth about $ 41 million today.
Barron’s he 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 the history of the American corporation. More importantly, looking at the market for a long time offers lessons on how to put money to work.
Like the investment itself, digging into a century-old data is not easy. We tried to calculate 100-year returns for indices, as well as for some prominent companies that have been trading continuously for a century.
For indices, price levels are slight. S&P closed at about 6.8 in 1920. Dow closed that year at about 72. S&P closed 2020 at 3,756 and Dow closed over 30,000.
This results in average annual gains of 6.5% and 6.2% respectively. That doesn’t mean 10%. But about 40% of total stock returns are historically dividends. And getting a dividend list for a hundred years is hard.
For companies, calculating returns per 100 years is almost impossible, although we have succeeded for a few. Many companies happen in a century, including mergers, rotations, share divisions and name changes. And getting dividends for companies for a century is more difficult than getting them for an index.
Data collection essentially requires an examination of the stock tables published in Barron’s and The Wall Street Journal decades ago. The companies we started looking at were of no help.
These included:
Altria
(ticker: MO), former Philip Morris;
General Electric
(YES);
Union Pacific
(UNP); and
Honeywell International
(HON), among others. Honeywell, for example, has just celebrated 100 years since trading on the New York Stock Exchange.
However, neither Honeywell nor the stock market was able to answer the question: What is the average 100-year annual return on Honeywell stock?
They can’t really be blamed. 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 given up a few companies, including
AdvanSix
(ASIX). Tracking rotations is an additional headache.
The end, Barron’s It found that
United States of America
(X) has returned on average by about 5% per year in the last century. GE managed about 9%. Union Pacific slightly surpassed the Dow by about 11%, while Altria takes the cake, returning by about 15% per year.
Superior performance is added. Ten percent a year with $ 3,000 becomes $ 41 million. Fifteen percent to $ 3,000 becomes $ 3.5 billion. It seems impossible. But Altria also came out
Mondel
(MDLZ) and
Philip Morris International
(PMI) which together have a market capitalization of approximately $ 290 billion. It would be a very big company today.
Moreover, the parent company paid nominal dividends worth millions over 100 years, based on an initial share of $ 3,000.
The $ 3,000 figure was not chosen at random. This was the average household income in 1920, according to the domestic income service. Not many Americans can dedicate a year’s wages to the stock market at once, but the growth still illustrates the power to compose returns.
The power of composition is one of the biggest investment lessons of the 100-year profitability exercise. But there are others. Growth, market share and industry structure always matter for stocks.
Electricity demand has risen by an average of about 4 percent a year since many Americans read by candlelight. This stimulated GE’s business.
The total number of railroad miles in the United States has not increased at all, but the freight shipped over them has increased. Moreover, 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 holder with a vast cash flow, expertise and infrastructure that is difficult to replicate – decades before Google’s parent alphabet (Google) dominated the search industry.
Meanwhile, consumer products, including dependent ones, are usually stable investments. Commodity industries can also be difficult, as US Steel yields show.
What is also clear is that long-term dividends are huge. And even the long-growing big companies – GE and US Steel were FAANG shares of their day – have finally paid dividends.
And that’s part of the answer to the question: How to 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 billion.
Write to Al Root at [email protected]