Yield on Cost

“If you are planning to retire in 10 to 15 years, we think you should consider buying stocks that have long histories of dividend increases. While investors tend to look at the current yield (the indicated dividend dividend by the share price) of a stock, we believe yield on cost (the indicated dividend divided by the per share purchase price) may be a more accurate measure of the long term value of a dividend.” Standard and Poors Outlook, September 8 2004

“For me the value of YoC is understanding the history of how a company treats its shareholders. In other words, simply helping to answer the question, “Is it a good company to invest in over the long term?”

“Shares of Microsoft currently have a dividend yield of about 3% (October 2012). After a consistent annual increase of 15%*, for five years in a row, your dividend yield will equal 6% on those original shares even if the stock has not moved at all during that time period. Fast forward 5 more years, and you will be sitting on 12% dividend yield each and every year without doing anything extraordinary.” Shmulik Karpf (The Motley Fool) *MSFT's rate of dividend growth since starting its dividend in 2003 has been 15% a year.

81% yield on cost - “From 1956 to 1981, the IBM dividend grew 19 percent a year. That 19 percent is a handsome return all by itself, even if capital appreciation had been zero. The total accumulation of dividend over those 25 years equaled six times the original purchase price in 1956. The 1981 dividend was equal to 81 percent of the original purchase price.” Peter L. Bernstein, FAJ March/April 1985

  • My friend Kerry is a Chartered Accountant, so he thinks like an accountant. Kindly, he sent me these thoughts on 'Yield on Cost.' “YOC is an indicator of what a stock has done in the past. The decision to sell, buy or hold should be based on what a stock is going to to do in the future.” Kerry's right, of course. It's true. But sometimes I'll hold a common stock bought years ago which, because of past dividend growth has a high YOC, even though the company has stopped growing its dividend. Those big current dividend cheques are a delight to receive, even if this year's cheque is the same as last years. I think to myself, if I had bought a bond with that capital those many years ago, my interest cheques would still be the same as the bond coupon I received the first year. Then I smile. I love growing dividends and the increasing deposits in my retirement account. It's only been two years, but I have yet to touch capital in my RRIF. I have, on occasion sold stocks that were no longer pumping out increasing dividends. TransAlta comes to mind.
  • If yield my on cost is rising, I know I own a fine company: both yield and price are being driven by increasing dividends. We relish the increasing dividend deposits in our accounts. Our highest YOC is BNS bought in 1990 at a split adjusted $3.64 a share: its 68%. BNS dividend was 25¢ in 1990: now (October 2013) it's $2.48. If you wish to compare YOC to anything, how about a 30 year bond. If I had purchased a 30-year bond in 1990, the interest coupon would still be the same. Now that's fixed income.
  • OUR YOC's - A list of the 22 common stocks we own (never preferred) with their YOC, start dividend rate and price were outlined in Connolly Report of August 2011. Eight have double digit YOCs. Driven by dividend growth, our prices are now well over one million dollars. I never would have dreamed.
  • We purchased, luckily, some Great West Life in March 2009 for $14.18 per share. The dividend was, and still is, $1.23. the yield is therefore 8.7%. The current price (Nov 2013) happens to be $33 a share. With the higher price, the yield is now 3.7%. Neither of these things change our yield, do they? Our yield is still 8.7%. Suppose though, that the dividend had increased over the last few years. The income on our investment would be up and so would our yield be up.
  • “With each dividend increase, the return on invested capital grows higher.” Geraldine Weiss, IQ Trends
  • Some people who do not 'believe' in YOC argue that what happened ten or 15 years ago is not always a good indicator of the future. That's true. I'm not saying that YOC is an good indicator of the future. However, if the dividend has grown since purchase, YOC is a good indicator the company is doing well. If a company has a 'culture' of increasing its dividend the pattern could easily continue. ♣ If folks are not using YOC to to measure because it is rooted in the past, how do they measure their returns? Do they not use a past-connected number also. Growing yield is the essence of what the dividend growth strategy is about. Growing yield drives returns. If the yield does not grow, essentially, you have a bond.
  • Most of the long-run return from stocks comes from dividends…increasing dividends. Yield on cost is a method of measuring this return. Don't believe most of the return on stocks comes from dividends? In his 1934 classic Security Analysis, Ben Graham put it this way: “Since the market value in most cases has depended upon the dividend rate, the latter could be held responsible for nearly all the gains ultimately received by investors.” Chapter 35
  • AGAINST YOC - “I cannot agree with you when you give “return” based on acquisition price, Tom. I think it's a false sense of security.” TC: You are correct. Most investors use price gains to measure return. However, I would argue that dividends are more certain than price. Once banked, dividends are yours to keep. And next year, I bank the higher dividend too. And the year after… Price, on the other hand, is subject to market whims. I do not measure return based on price alone.
  • DIVIDEND on ACQUISITION - “I just recommended a stock to my Yield Shark subscribers that’s the epitome of “doing something smart.” It’s paying a 2% dividend right now—not all that exciting, you might say. BUT its dividends have risen so consistently that had you bought shares 15 years ago, your “dividend on acquisition” (i.e., today’s dividends as a percentage of what you actually paid for the stock) would now be an astonishing 14.6% per year. Combine equity appreciation and dividends, and you end up with a total return of 502% over 15 years. Not too shabby, if you ask me.” By Tony Sagami of Mauldin Economics.
yield_on_cost.txt · Last modified: 2015/12/08 12:18 by tom
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