O
Dow Jones Industrial Average
and the
S&P 500
have returned about 10% a year for a century. These returns mean that $ 3,000 invested in the late 1920s would be worth about $ 41 million today.
Barron’s took a look at the numbers because we’re doing 100. It was partly an exercise in nostalgia, but also a fascinating walk through the tangle of mergers that is American corporate history. Most importantly, looking at the market for a long time offers lessons on how to put the money to work.
How to invest yourself, digging into centuries-old data is not simple. We tried to calculate 100-year returns for the indices, as well as for some prominent companies that have been traded continuously for a century.
For indices, price levels are easy. The S&P closed at about 6.8 in 1920. The Dow ended that year at around 72. The S&P closed 2020 at 3,756 and the Dow closed above 30,000.
This results in average annual gains of 6.5% and 6.2%, respectively. This is not 10%. But about 40% of total stock returns have historically been dividends. And getting a hundred-year dividend list is difficult.
For companies, calculating the 100-year payback is almost impossible, although we have achieved that for some. A lot has happened to companies in a century, including mergers, turns, share splits and name changes. And getting dividends for companies for a century is more difficult than getting them through an index.
Essentially, data collection requires the analysis of action tables published in Barron’s and Wall Street Newspaper decades ago. The companies we started looking for didn’t help at all.
They included:
Altria
(ticker: MO), former Philip Morris;
General electrical
(GE);
Union Pacific
(UNP); and
Honeywell International
(HON), among others. Honeywell, for example, has just celebrated its 100th anniversary of trading on the New York Stock Exchange.
Still, neither Honeywell nor the exchange was able to answer the question: What is the average annual 100-year return on Honeywell shares?
They can’t really be blamed. A century is a long time. And Honeywell is a merger 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 separated some companies, including
AdvanSix
(ASIX). Keeping track of spins is an added headache.
In the end, Barron’s find something
United States Steel
(X) returned about 5% per year on average in the last century. GE achieved about 9%. Union Pacific slightly surpassed the Dow by about 11%, while Altria takes the cake, returning about 15% per year.
Superior performance increases. Ten percent a year at $ 3,000 becomes $ 41 million. Fifteen percent over $ 3,000 becomes $ 3.5 billion. This seems impossible. But Altria also spawned
Mondelez
(MDLZ) and
Philip Morris International
(PMI), which together have a market capitalization of around US $ 290 billion. It would be a very big company today.
In addition, the parent company paid nominal dividends worth millions over 100 years based on an initial stake of $ 3,000.
The $ 3,000 value was not chosen at random. That was the average family income in 1920, according to the IRS. Few Americans can dedicate a year’s salary to the stock market all at once, but the growth still illustrates the power of compound returns.
The power to capitalize is one of the greatest 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 since many Americans were reading by candlelight. This boosted GE’s business.
The total number of rail miles in the United States has not grown, but the cargo sent by them has grown. Furthermore, it is difficult to build a competitive railroad from scratch. Union Pacific helped show the world the benefits of network effects – the difficulty of challenging an incumbent with vast cash flow, experience and infrastructure that is difficult to replicate – decades before Google’s parent alphabet (GOOGL) dominated the search industry.
Consumer products, however including addictive ones, are generally stable investments. And commodity industries can be difficult, as US Steel’s returns indicate.
What is also clear is that the dividends in the long run are huge. And even the high-growth companies of long ago – GE and US Steel were FAANG shares of their day – 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% per 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]