How My Grandpa Dennis Could Have Turned His Pepsi Habit Into a 7-Figure Estate

Pepsi Common Stock CertificateI’ve written in the past about how nearly every American alive today has been confronted with perhaps a dozen different companies that they knew first hand because they enjoyed using the firm’s products for years (in some cases, their whole life) that turned out to be spectacular investments.  Yet, they never thought to research the business and consider becoming an owner.

One of the things I think about a few times a year is my paternal grandfather’s Pepsi habit.  My dad’s side of the family, which grew up just outside of San Francisco, joked that no one made breakfast for Dennis (my grandfather) because “he could open his own Pepsi”.

Over the past 60+ years, Pepsi has been one of the best investments in the world.  With dividends reinvested, it has compounded at somewhere between 13% and 15% annually, depending upon the period.  If we go on the low end of that figure, say 13.5%, it is interesting to see how much money they could have had by simply investing in, and owning, a product that they knew, understood, and used.  They saw Dennis drink, and enjoy, this product every day of their lives.  There was a rule in the house that no one drank the last Pepsi, which should be a fairly good indication of the emotional power the brand had with its consumers.

Imagine that in 1950, my dad’s family had created an investment company – let’s call it Kennon Beverage Holdings, Inc. – for the sole purpose of investing in Pepsi stock.

Each week, they contributed $10 to the company, which it used to purchase additional shares of Pepsi.  They reinvest their dividends and never increase their savings rate (meaning that even today, they would still be kicking in only $10 each week among all of the family members – so about $1.50 each per week).  Kennon Beverage Holdings itself has only a few shares; each time a new child is born, they issue a single share of stock to him or her.

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What the Kennon Family Business Would Look Like Today

Pepsi Cola Stock

Had they done this, today, Kennon Beverage Holdings, Inc. would have eight shares of stock outstanding and each family member would own one of these shares (e.g., one would be owned by Kathryn, one by Sharon (Dennis’ widow, to whom he was remarried for decades), and one by each of the kids: Danny, Eddie, Paul, Mark, Kimmy, and Dave).

This family business would have the simplest balance sheet and income statement in the world:

  • It would show a single asset of 117,713 shares of Pepsi with a market value of roughly $7,677,242.
  • The company would generate more than $211,883 in cash dividends each year.

The family would have three options during its shareholder meeting each Christmas:

  • They could pay the taxes owed on the cash dividends and reinvest the net back into additional shares of Pepsi stock for future growth.
  • They could distribute all of the cash dividends to the shareholders so they could live on the money.  If there were eight shares outstanding of Kennon Beverage Holdings, Inc., each held by a family member, each investor would receive a check for $26,485.38 every Christmas and be responsible for paying the 15% or so dividend tax that was due.
  • They could liquidate the company and distribute the Pepsi stock to each stockholder of Kennon Beverage Holdings, Inc.  Each of the eight stockholders would receive $959,655.25 worth of Pepsi shares that they could either continue to hold or sell for cash.

All for $10 a week. That is how powerful long periods of time can be when you are thinking about compounding.  Can you imagine if they had kicked in $20 a week and bought Coca-Cola stock in addition to the Pepsi investment?

This is one of the reasons that 80-90% of millionaires in the United States are self-made with only 10-20% coming from inheritance.  If you know how compounding works, it is simple to get rich.  The problem is, schools don’t teach this stuff (even though it just basic algebra) and you are unlikely to learn it unless you were born into the small percentage of financially savvy families in the country.

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What To Take Away From This …

A lot of people reading this will say, “Yeah, that’s nice … too bad it didn’t happen.”  They probably will move on, never thinking about it again.  The point is: What are you doing in your life right now – today – to make sure that your family is in the favorable position 40, 50+ years from now?

Image Credit for Vintage PepsiCo Caps in Top Banner: emka74 / Shutterstock.com

  • cullinaire

    I understand that this is just a lesson, but let’s go back in time and suppose they decided to do this very thing – how are they going to avoid the commissions on the weekly transactions?
    I’m not being nitpicky – I’d really like to know!

    • The most effective way would be to enroll in a program known as a DRIP, which virtually all major corporations have. It stands for [d]ividend [r]e[i]nvestment [p]rogram. Most charge nothing for commissions on stock purchases or reinvestment of dividends. Those that do charge perhaps $1 or $2 at the most per transaction (and that’s today so back in the 50’s it would have been a few pennies).

      A lot of investors don’t know these programs exist because there is no interest in anyone pushing for them. Someone could setup DRIP accounts with 10 of their favorite companies, have $100 withdrawn from a bank account automatically each month, saving $1,000 per month, or $12,000 per year, and if the businesses are well chosen, they should retire comfortably 35+ years from now, all else equal.

      In the case of Pepsi, their direct stock purchase plan or DRIP plan has a one-time $10 setup fee and then NO commissions or fees thereafter it looks like. I found this info on the Pepsi DRIP page. It appears the only real limit is that you cannot invest more than $120,000 annually through the program, which isn’t going to be a problem for 99.9% of the population.

  • Frat Man

    Do you think the biggest hurdle to getting people to hop on board with dividend reinvestment plans of blue chip companies is the seemingly paltry dividends that someone initially starts out with? That is, a 3% yield on a $1,000 investment is only going to get you $7.50 a quarter at the beginning, and that’s why people don’t bother? I wish more people realized that it’s essentially a (hopefully) growing $7.50 quarterly stream that you will get for the rest of your life, with no expiration date in sight. The fact that it accumulates indefinitely is what hooked me, but a lot of people don’t connect those dots.

    In terms of how to fix that, do you blame the school system for the lack of financial literacy, parents for setting a poor example, or–and I realize this may go against everything your website is about–maybe people who become members of the capitalist class have this ‘delayed gratification’ wiring in their genetic make-up that separates them from the American norm that breeds an overwhelming desire for the constant satiation of needs?

    • I think that is exactly the reason. I also think people don’t think in terms of time, which the should.

      If you were a new hire at Wal-Mart and you made $10.00 an hour, you might be lucky to get away with $7.50 per hour after the government has taken out taxes. That means that a $7.50 dividend would be the equivalent of one of your coworkers walking up to you and handing you their check for an hour that they had to work, every year, for the rest of your life. Even better, it could continue after your death depending upon who you allow to inherit your ownership.

      If the average person in that situation works 40 hours a week, 48 weeks out of the year, they need to come up with a net $14,400 in dividend income to replace 100% of the then-market value of their labor.

      Furthermore, if the company is healthy, the dividend grows each year, which is like getting a raise. Figure out how to use your money to collect assets like this and then they start generating money that can be reinvested to buy more assets and the virtuous cycle begins.

      The problem is no one wants to start with $7.50 in dividend income or profit from a business. Instead of looking to the future, they never begin. It would be like the pioneers in American history not wanting to leave New York because their first step meant they still had 99.99%+ of the journey to go. That is a defeatist view of life. People like that always get left behind as others strike out on their own.

      That is why one of my favorite quotes from the Bible is: “Do not despise the day of small beginnings.”.

      Can you imagine if the Wright Brothers had given up on their first flight simply because they couldn’t reach the moon? Yet, that is exactly what many people do in countless areas of their life each and every day.

  • Rebo1969

    I would like to know if there is a maintenance fee for your stock since it has a drip attached to it?

    • Joshua Kennon

      Every DRIP is different. You need to get the plan prospectus from the company’s transfer agent (just contact the investor relations department). For example, I know of one DRIP plan that charges $2 for every automatic investment, so if you were investing $400 per month, that would be 0.5% expenses at the outset, but it doesn’t charge for dividend reinvestments. I know of another plan that charges investors nothing. You have to read the literature.

  • akshat_c

    A very interesting and helpful article.

    However, I have just started on building my knowledge on stock investments and the answer to one question eludes me.

    How does inflation over such long periods (50+ years) attribute to the calculations in the Pepsi example. $10.00 in 1960 had the same buying power as $78.10 in 2013 (approx. annual inflation over this period was 3.95%). $10 a week seems a reasonable amount today for such huge returns in the future, however your grandpa (in 1960) would have been parting with a lot more money (or share of his income).

    Another way to express myself would be: If we followed the exact strategy starting today, and expected the same 13.5% return (after dividend reinvestment), we would have around $7.6 million in 2060. 7.6 million sound great today. But 50 years from now, will this amount look as lucrative as it does today?

  • Todd

    I’m listening : found this old post and love it. So the Kennon Beverage Holdings, Inc would have 117,713 shares of Pepsi and thanks to Yum spin off in 97 – 11,771 shares of Yum Stock. Total value today-2016- of both companies is $12,960,058 Total dividends of both companies is $352,432. Joshua your original post on this is 2010 does it figure in the Yum spin off?

  • Donna Bayley Lovett

    This is the article that stopped me in my tracks, and a few weeks later after investigating all options, I opened up an Investor’s Edge account with CIBC. My philosophy in life is that it’s never too late….unless you are dead, and I’m certainly not dead yet! Twenty years from now I will be very grateful that I started investing, instead of just reading about it.