Let’s play a fun hypothetical game. Let’s say it’s March 1986, you’re 25 years old, and you’ve just inherited $10,000 from a rich uncle. You were wondering how to use that $10,000. You thought about buying a cool car or maybe a boat. Before doing something really stupid, you call a friend from college who works as a stockbroker.
That friend gives you the following advice:
“On Thursday, this little software company in Seattle is going public. I don’t understand what they do, but everyone in the office thinks this is the company of the future. It’s called Microsoft. Invest the $10,000 in Microsoft stock the moment it becomes publicly available.”
You follow his advice, and on March 13, 1986, that relatively small Seattle-based software company called Microsoft makes its debut on the public markets. In real life, the hype over Microsoft on IPO day was so intense on the trading floor that the opening price jumped from $16 to $21 at the last minute. At the end of the trading day, the stock was trading at $27.75.
That day created three of the largest personal fortunes in human history for founders Bill Gates and Paul Allen, and CEO Steve Ballmer.
But what about our hypothetical dream scenario? What kind of fortune would you be today if you had followed your broker’s advice, bought $10,000 worth of stock in an IPO, weathered the dot-com crash, the 2008 financial crisis, and decades of technological evolution without selling a single stock?
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$10,000 invested in the IPO
By purchasing at the initial offering price of $21 per share, your $10,000 would have given you exactly 476 shares of Microsoft. However, today there would be only 476 shares. Over the years, Microsoft has made NINE stock splits:
- Initial Purchase (March 13, 1986): Your $10,000 at the $21 IPO price allows you to purchase exactly 476 shares.
- Split 1 (September 21, 1987): A 2-for-1 split doubles your pool to 952 shares.
- Split 2 (April 16, 1990): Another 2-for-1 split brings you to 1,904 shares.
- Split 3 (June 27, 1991): A 3-for-2 split increases your account to 2,856 shares.
- Split 4 (June 15, 1992): Another 3-for-2 split increases your holding to 4,284 shares.
- Split 5 (May 23, 1994): A 2-for-1 split doubles your stack to 8,568 shares.
- Split 6 (December 9, 1996): Another 2-for-1 split shoots your account up to 17,136 shares.
- Split 7 (February 23, 1998): A 2-for-1 split leads to 34,272 shares.
- Split 8 (March 29, 1999): Another 2-for-1 split doubles your stake to 68,544 shares.
- Split 9 (February 18, 2003): The final 2-for-1 split doubles your count one last time, bringing you to a staggering 137,088 shares in total.
Thanks to the magic of those nine splits, your original block of 476 shares would have ballooned into a staggering stash of 137,088 shares.
As I write this article, Microsoft is trading at around $404 per share. So your 137,088 shares, which you bought 40 years ago today for $10,000, would be worth $55,383,552.
But that’s not really the full story.
Microsoft famously did not issue dividends during its first 17 years as a public company. The company issued its first dividend in 2003. Suppose your hypothetical college stockbroker friend called you in 2003 and said:
“Hey, you know those Microsoft shares you still own that are worth about $2 million today? First of all, you’re welcome. Second, I just enrolled your account in a dividend reinvestment plan (DRIP). In the future, every time Microsoft issues a dividend, instead of receiving cash, you’ll use that money to automatically buy more shares. Cool? Ok, see you at the meeting! You owe me a beer!”
Fast forward to the present. If you kept all your shares and remained enrolled in the DRIP plan, today you would have approximately 220,000 Microsoft stock. And at the current share price of $404, your $10,000 investment in 1986 would now be worth…
$88,880,000
And, in fact, it gets better.
Since you now own ~220,000 shares, your quarterly dividend payments at Microsoft’s current annual rate of $3.64 would generate approx. $800,800 in completely passive cash each year.
That’s $88 million in net worth and $800,000 in annual passive income, all from a single $10,000 investment 40 years ago.