The PEPSI Dividend Example

Let’s take a look at the power of compounding by examining an investment in Pepsi.  Pepsi, one of the largest companies in the world, is a global firm that maintains a high level of cash generation and ample dividends. The key to owning stock in companies like Pepsi is not the stock’s daily price performance, but the cash the company allocates to its shareholders. Consider an investor who earmarked $100,000 of her retirement portfolio to Pepsi right at the end of the last secular bull market, 2000. For simplicity’s sake, I’ve rendered the information in Table 3.1 by showing the proceeds from the $100,000 initial investment in Pepsi shares in 2000 and then at the end of each subsequent year. The investor began with 2,680 shares of Pepsi from her initial $100,000 investment. During the first year of investment, she received $1,500.80 in dividends. She could—and did—choose to use the proceeds of these dividends to purchase forty more shares of Pepsi at the end of the year. Each year, her number of shares grew, and the dividends she received were reinvested.

The Pepsi investor started her investment program in 2000 with 2,680 shares of stock. By the end of the secular bear market in 2011 she held 3,432 shares of stock.  Her portfolio had more than doubled over that period of stagnation.  I continued the example through the end of 2022.  By then, she had accumulated 4,672 shares. Table: Pepsi Dividend Reinvestment Example, 2000–2022

One of the key elements to the growth in her portfolio was dividend enhancement each year.  Throughout the period of her investment, Pepsi continued to advance its dividend substantially: In 2000, the yearly dividend was $0.56 per share, but by the end of 2022, the dividend had risen to $4.53 per share and was expected to be $4.60 per share in 2023. Since the investor owned 4,672 shares of Pepsi in 2022 thanks to her stock repurchasing plan, her total net portfolio on December 31, 2022 was $844,043.52 —over eight times her initial investment. There are several noteworthy points about this exercise:

• Dividend growth is just as important as the yield paid at the initial stock investment. The power of compounding is enhanced through rising dividend payments. The more shares you own and the higher the annual dividend rises in the future, the better the compounding effect works in your favor.
• When the stock market goes through difficult periods, such as it did in 2008, an investor focused on building wealth through the compounding effect of dividend reinvestment comes out ahead. The reason: If prices fall, it simply means that the investor can buy more shares.
• Examine the amount of shares repurchased at the end of 2008 versus 2007 in Table 3.2. The Pepsi investor was able to purchase 106 shares of Pepsi stock with dividend proceeds at the end of 2008—substantially more than the previous year’s repurchase of 68 shares. When Pepsi’s share price dropped, the investor was able to purchase more shares when she reinvested her dividends. It may seem counter-intuitive, but a temporary drop in price for a dividend-yielding stock an investor owns is a benefit, as it allows her to buy more shares.

Table 2: Pepsi Dividend Reinvestment Example, 2007–2008

Investors focused on building wealth through dividend investing must overlook periods of extreme market volatility and not be frightened away from the stock market in secular bear markets. An erudite investor who chooses to stay with a dividend reinvestment program through thick and thin will be rewarded.