Monday, March 25, 2013

Yield on Cost, the Big Picture

Sometimes, it's easy to feel after so much hard work each year, our investment portfolios are barely going anywhere. This feeling is amplified when you look forwards and back and see how far you are from your goals.

Yield on cost is a good way for dividend growth investors to see meaningful fruits from their labor, as well as track their progress.

If you're unfamiliar with the term 'yield on cost', it simply means the current dividend yield based on your original cost of investment. It is simply the annual dividend divided by your original per share cost.

Here are some yield on costs for investments from several years ago:

Scotiabank: 5.7%
CN Rail: 2.4%
Rogers: 5.0%
Johnson & Johnson: 4.5%
McDonalds: 3.9%
Coca Cola: 4.3%
JP Morgan: 4.5%

many of these also include recent / newer purchases, so the yield on cost on the original tranches are even higher.

A word of caution. Its important to not get overly attached with yield on cost. It is also important not to view the yield on cost as how much you are making per year. A simple example will show you why.

Suppose initially you buy 1 share of a stock at $100, paying a dividend of $1 per quarter, $4 per year (4% yield at the time). In 3 years this stock is worth $200, and is paying a dividend of $2 per quarter, $8 per year (still 4% yield).  Your yield on cost would be $8 / $100, or 8%. Now suppose the stock has no capital appreciation in year 3, so your only return is the $8 in dividends. Is your return 8%? Of course not. Any person can see your return is $8 in dividends on $200 at the beginning of the year, or 4%.

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