The
Dow Jones Industrial Average
and the
S&P 500
yielded about 10% per annum for a century. The returns mean that $ 3,000 invested at the end of 1920 is worth about $ 41 million today.
Barron’s looked at the numbers because we become 100. It was partly an exercise in nostalgia, but also a fascinating walk through the turmoil of mergers that is American corporate history. More importantly, looking at the market over a long period of time offers lessons on how to put money to work.
Like investing yourself, digging into age-old data is not easy. We have been trying to calculate the returns of 100 years for the indices, as well as for some prominent companies that have been trading continuously for a century.
For the indices, the price levels are easy. The S&P closed around 6.8 in 1920. The Dow ended that year at about 72. The S&P closed at 3,756 in 2020 and the Dow closed above 30,000.
This is the average annual profit of 6.5% and 6.2% respectively. It is not 10%. About 40% of the total share returns are historically in dividends. And it’s hard to get a list of dividends for a hundred years.
For companies, calculating 100-year returns is nearly impossible, even though we have managed it for a few. A lot is happening to companies in a century, including mergers, turns, stocks and name changes. And getting dividends for companies for a century is harder than getting them for an index.
In order to collect the data, one must essentially look at inventory tables that are in Barron’s and The Wall Street Journal decades ago. The companies we started looking at were no help.
This included:
Altria
(ticker: MO), the former Philip Morris;
General Electric
(GE);
Pacific Ocean
(UNP); and
Honeywell International
(HON), among others. Honeywell, for example, has just celebrated its 100th anniversary on the New York Stock Exchange.
Still, neither Honeywell nor the stock market could answer the question: What is the annual average annual return on Honeywell shares?
They can not really get the blame. 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 founded in 1920. Minneapolis Honeywell was founded in 1927. Then Allied and Honeywell merged in 1999, now known to investors as Honeywell International. More recently, Honeywell has several companies, including
AdvanSix
(ASIX). Keeping track of the turns is an extra headache.
In the end, Barron’s found that
United States steel
(X) has yielded an average of about 5% per annum over the past century. GE achieved about 9%. Union Pacific outperformed the Dow by about 11%, while Altria takes the cake and yields about 15% a year.
Output performance adds. Ten percent a year at $ 3,000 becomes $ 41 million. Fifteen percent at $ 3,000 becomes $ 3.5 billion. It seems impossible. But Altria also struggled
Mondelez
(MDLZ) and
Philip Morris International
(PMI) which together have a market capitalization of approximately $ 290 billion. It would be a very big company today.
What’s more, the parent company has paid out nominal dividends worth millions over 100 years based on an initial share of $ 3,000.
The $ 3000 figure was not chosen at random. According to the Internal Revenue Service, this was the average household income in 1920. Not many Americans can devote a year’s wages to the stock market at the same time, but the growth still illustrates the power of composite returns.
The power of composition is one of the biggest investment lessons from the 100-year rate of return. But there are others. Growth, market share and operating structure are always important for equities.
Demand for electricity has grown at an average of about 4% per year since many Americans read by candlelight. This boosted the business of GE.
The total mileage in the U.S. has not grown at all, but the cargo sent over it has. What’s more, it’s difficult to build a competitive railway from scratch. Union Pacific has helped the world demonstrate the benefits of networking – the challenge of challenging a recruiter with great cash flow, expertise and hard-to-replicate infrastructure – decades before Google’s parent alphabet (GOOGL) dominates the search industry has.
Consumer products, including addictive ones, are usually stable investments. And commodity trades can be difficult, as US Steel’s returns show.
What is also clear is that dividends are large in the long run. And even the big growth companies of long ago – GE and US Steel were FAANG shares of their time – eventually paid dividends.
And that’s part of the answer to the question: How can we make $ 3,000 into $ 41 million? Invest in the stock market, reinvest the dividends and do not touch the money for 100 years.
Corrections and reinforcements: If you invested $ 3,000 at the end of 1920 and earned 15% per annum for 100 years, it would be worth $ 3.5 billion. In an earlier version of this article, $ 3.5 billion was wrongly mentioned.
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