Imagine if your investments could cover some of your fixed living costs forever. Perhaps your mobile bill, electricity or car expenses? Imagine how nice it would have been to own a perpetuity machine that will produce values for you year after year, a fixed income.

Last summer we wrote a tweet which was well received by our followers. It was about getting a free coke every saturday for the rest of your life. A coke that is paid by your dividends from The Coca-Cola Company. How much do you have to invest before the dividends can cover a coke every Saturday for the rest of your life? We figured it would cost something like $4,600.

How can you earn money on stocks?

As a shareholder in The Coca-Cola Company you own a small share of the company, and with that share you have a right to get a similar proportion of the income that the company generates.

Stock are not pieces of paper where the price jumps up and down, which you try to apply a Sharpe ratio on or make fancy trend lines or figure out patterns. Stocks are ownership in businesses that you try to value and buy at a discount.

The Coca-Cola Company pays out a part of its earnings to the shareholders as a quarterly dividend. The dividend is paid out four times per year. A company can do several actions when it has earned money. It can pay it out to the shareholders as a dividend. Or it can use the earnings to buy back its own stock, which is another form of payback to the shareholders. Or it can invest in new assets, machines etc, so that it might earn more in the future.

If the company reinvests money instead of paying it out as a dividend, the idea of the management is to invest its retained earnings into more into profitable projects. If the management succeeds, the company will earn more money, and then the share value will eventually go up. A good management will manage over time to generate at least a dollar of price increase in its stock for every dollar reinvested. 

How do the calculations look?

When we wrote on Twitter in the summer of 2020 the quarterly dividend of The Coca-Cola Company was $0.41 per share. The company had paid out a dividend the last 58 years in a row, and it had also increased the dividend slightly every year.

The increase in 2020 was from $0.40 in 2019 to $0.41, which is a 2.5% increase.

With a quarterly dividend of $0.41 the shareholders would earn $1.64 per share from the dividends.

A yearly consumtion of Coke every Saturday could cost roughly $3.30 per week, or about $172 per year, in a cheap restaurant. You would therefore need about two shares in The Coca-Cola Company to cover a free Coke per year. To cover a whole year you would need approximately 100 shares (2x52 = 104).

When we tweeted a share of Coca-Cola costed about $46. 100 shares would then have costed $4,600 more or less. Let's assume that the investment is safe and you will not lose any earning power in it. Imagine if you made an investment of $4,600 once and let it produce and earn you a free coke every Saturday for the rest of your life, without needing to administer or work in the company. A perpetuity machine that you don't need to maintain, and which will work without your further efforts. Would you like a coke on Sundays as well? Invest another $4,600!

With this example we would like to show you how you as an investor can gradually get your investments to cover your consumption. Over time this investing mindset can help you cover larger parts of your living costs through further investments. What do you want your investments to cover? Rent, groceries, or perhaps a day off? As you can see, it is possible to cover nice things with investments that could be within reach in the not so distant future.

How should the investor think about market fluctuations?

In this thought experiment you could cover parts of your coke consumption with only 100 shares in The Coca-Cola Company. To obtain that you only had to invest about $4,600 last summer, that you might have earned from hard work over time, or perhaps it was from earnings from stocks that you owned earlier.

A stock earns in essence only as much as the company earns over time. What the company is earning every year depends on how many units it sells annually, and how much it earns per unit sold. Warren Buffett and Benjamin Graham often said that price is what you pay, while value is what you get. What they meant was that the stock price fluctuates all the time, while the earning power and amount of coke bottles the company sells is another story. The stock price can vary a lot over time, and therefore it can happen that you can get some good opportunities to take advantage over the market flucuations. What you pay for a stock should be based upon the fundamentals and what the company will earn, not what the market trades at every day.

There are also many investor who check the prices of their investments many times per hour. Is that really necessary?

Take the case of the Coca-Cola perpetuity machine. Will it produce more cokes if you visit the machine every other minute? Will it produce fewer cokes if the stock market were to go up or down a few percent the next day? The machine is still worth what it produces, and it's up to you to figure out what that value is.

You can use the market fluctuations to your advantage. When the price is low enough it might happen that you've got a good margin of safety compared to what you have estimated that the value is. If a bridge is designed to hold 5,000 pounds, would you cross the bridge with a truck that weighs 4,500 pounds? Or would you rather drive to the next bridge that that can hold 10,000 pounds instead?

What price should you pay for a stock?

It is not seldom that we hear success stories from others who share their experiences of having a stock that has gone up. They have become richer after a good investment. But what if you really want to be a net buyer of your favorite company over many years? Wouldn't you want the price of the stocks to be lower, so that you could get more dividends or more coke servings per share when you invest? The best would be: The price stays low, while the value of what you get increases every year. In the example above a weekly coke would cost you $4,600. Now the stock costs about $52.50 and you have to pay about 14% more for the same shares. Look at the historic dividend of the stock however. It has doubled in the last ten years.

You can make a legacy

As all other possessions you can make a legacy out of your shares. The income from the perpetuity machine doesn't stop, as long as the company behind it continues to produce. Do you think The Coca-Cola Company will earn as much now as when your grandchildren will grow older? Maybe more? Or maybe you know about other companies that you think will continue to produce value for the shareholders for a long time?

When you have found a good company you might just sit and hold on to it. You don't need to look at the price anymore, because you know the company well, and you know what it produces. Companies that have good balances, are stable and are built to last will continue to produce value even when the time comes that you want to give the shares to someone else. The output of the stock may have increased substantially since you bought it, and it will turn in to a nice legacy. Perhaps the 100 shares of The Coca-Cola Company not only produces a weekly coke, but four-five, or perhaps a daily coke, by the time your grandchildren take over the shares?

Key takeaways

• It can be valuable to stockpile assets that generate long term earnings. You can build the amount of assets over time.
• Try to figure out what the assets that you own produce of value, and if the assets will be more productive in the future, and that they will grow their earnings over time.
• Don't lose money. Then even small sums over time will grow substantially. Make sure you keep holding the assets and know what they produce even if the market fluctuates.
• Lower prices for you assets give you more value for the money. If you want to be buying stocks for the next 15 years, it is an advantage if the prices stay low. Then you get more value for the same amount of buying power, and you will reach your goal quicker.