The
Dow Jones Industrial Average
and the
S&P 500
have returned about 10% per year for a century. That return means that $ 3,000 invested at the end of 1920 would be worth about $ 41 million today.
Barron’s We’ve looked at the numbers as we’re turning 100. It was partly an exercise in nostalgia, but also a fascinating walk through the maze of mergers that is American corporate history. Most importantly, looking at the market over a long period of time will give you lessons on how to bet money.
Just like investing yourself, digging into age-old data isn’t easy. We tried to calculate 100-year returns for the indexes as well as for some prominent companies that have been trading continuously for a century.
For the indexes, the price levels are simple. The S&P closed at about 6.8 in 1920. The Dow ended at about 72 that year. The S&P ended 2020 at 3,756 and the Dow closed above 30,000.
That equates to an average annual profit of 6.5% and 6.2% respectively. That is not 10%. But historically, about 40% of the total stock return has been in dividends. And it is difficult to get a list of dividends for a hundred years.
For companies, calculating returns over 100 years is nearly impossible, although we’ve done it for a few. A lot has happened to companies in a century, including mergers, spins, stock splits and name changes. And getting dividends for companies for a century is more difficult than getting them for an index.
Collecting the data essentially requires looking at the inventory tables published in Barron’s and The Wall Street Journal decades ago. The companies we started looking at didn’t help.
They include:
Altria
(ticker: MO), the former Philip Morris;
General Electric
(TO GIVE);
Union Pacific
(UNP); and
Honeywell International
(HON), among others. For example, Honeywell just celebrated its 100th anniversary of trading on the New York Stock Exchange.
Still, neither Honeywell nor the stock market could answer the question, What is the 100-year average annual return on Honeywell stock?
They can’t really be blamed. A century is a long time. And Honeywell is an amalgamation of Allied Chemical & Dye – which eventually became AlliedSignal – with the Minneapolis Honeywell Regulator Company, which eventually changed its name to Honeywell.
Allied Chemical was founded in 1920. Minneapolis Honeywell was founded in 1927. Then Allied and Honeywell merged in 1999 to create what investors now know as Honeywell International. More recently, Honeywell has spun off a number of companies, including
AdvanSix
(ASIX). Keeping track of the spins is an extra headache.
Finally, Barron’s discovered that
Steel from the United States
(X) has returned an average of about 5% per year over the past century. GE has managed about 9%. Union Pacific slightly outperformed the Dow at about 11%, while Altria took the crown, returning about 15% a year.
Outperformance is correct. Ten percent a year of $ 3,000 becomes $ 41 million. Fifteen percent of $ 3,000 becomes $ 3.5 billion. That seems impossible. But Altria has also fanned out
Mondelez
(MDLZ) and
Philip Morris International
(PMI) which together have a market capitalization of approximately $ 290 billion. It would be a very large company today.
Additionally, the parent company has paid out a nominal dividend worth millions in 100 years based on an initial stake of $ 3,000.
The $ 3,000 figure was not chosen randomly. That was the average household income in 1920, according to the Internal Revenue Service. Not many Americans can spend an annual wage on the stock market all at once, but the growth still illustrates the power of compounding returns.
The power of compounding is one of the greatest investment lessons from the 100-year return exercise. But there are more. Growth, market share and industry structure are always important to equities.
Electricity demand has grown an average of about 4% a year since many Americans sat reading by candlelight. That gave GE’s business a boost.
The total miles of railroad miles in the US has not grown at all, but the freight shipped across it has. In addition, it is difficult to build a competitive railway from scratch. Union Pacific helped show the world the benefits of network effects – the difficulty of challenging an incumbent with massive cash flow, expertise, and hard-to-replicate infrastructure – decades before Google’s parent company Alphabet (GOOGL) dominated the search industry.
Consumer products, including addictive products, are usually stable investments. And commodity industries can be difficult, as US Steel’s results indicate.
What’s also clear is that long-term dividends are huge. And even the big growth companies of long ago – GE and US Steel were FAANG stocks 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 the dividends, and don’t touch the money for 100 years.
Corrections and reinforcements: 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]