Therefore, while an investor in Coca-Cola would have likely recovered their purchase price today exclusively from dividends alone, they should also not forget about the potential of capital gains. In the case of Coca-Cola, if my amateurish projections turn out to be closer to reality, investors could end up with a gain in net worth that exceeds the amount recovered through dividends.
All of the examples above do not take into effect the powerful nature of compounding. For example, let’s assume that you invested $100 today and earned a total return of 10% per year for 25 years. At the end of the period you would essentially generate as much in total returns in a year as the amount you initially invested.
Another risk with my analysis comes in the case of corporate failure. It would be much safer to generate your dividend income from many dividend paying companies, as opposed to just a few. That way, if one of these companies cuts or eliminates distributions when it falls on hard times, your overall dividend income would not be at a great risk. If you build an adequately diversified portfolio of at least 30 individual securities, chances are that the dividend income from this portfolio is much safer than the income from your day job. This is because if you are relying on just one company for income in your day job, but thirty or more companies for income with dividend investing.
Therefore, investors need to be very careful in their stock selection processes. For example, I learned from Warren Buffett to try and guesstimate 20 years into the future and try to decide if I believe the business I am investing in will still be around. It would be much easier to decide that companies like Nestle (NSRGY), Coca-Cola or General Mills (GIS) will be around in 20 years, because their products are characterized by repeated sales to customers, predictability of cashflows and pricing power.
I cannot tell you however whether Apple (AAPL) or Samsung (SSNLF) will be around in 20 years. After all, Blackberry (BBRY) went from being an $80 billion company in 2008 and the leader in smartphones, to a former shelf of itself within five years.
Full Disclosure: Long O, KO, GIS, NSRGY