Wednesday, July 6, 2011

Dividend Investing: 3 - Yield and Yield on Cost

Yield and Yield on Cost are pretty similar in how they are calculated but the one difference is a big one...

EDIT: At the time this blog entry was posted I had a Youtube video here. That has been removed but I want the rest of my content to be remain. Nothing hidden no past mistakes ignored. All out in the open.

In the video I ended with saying that I don't want to pay someone $20 to get $0.66 a year back which is what happened with AOD. That's a 3.3% yield on cost but isnt that what I am doing now if I were to buy a JNJ or KO?

I am not buying today's dividend dollar payout I am buying the 15 year in the future one.
I want to stress this point because its THE #1 cornerstone of dividend investing. Its something I will be repeating over and over and over again probably to the point of beating it to death. I see too many investors missing this point that they don't even consider dividend investing. If it doesnt fit for a person's strategy that is perfectly fine but at least understand it enough to be able to make that decision.

Let's break down the math of my Coca-Cola comment in the video.
KO in June 1989 was around $4.80 with a $0.0375 quarterly payment (adjusted for splits). That's a 3.1% yield.
Today it goes for $68.48 and has a $0.47 quarterly payment, $1.88 a year. That's a 2.7% yield. A person only thinking about yield would probably have skipped it. Maybe even returned to KO and thought its still not paying much.
Yield on cost? That $4.80 spent is making $1.88 a year.... 39% yield on cost. Don't even get me started on if they had reinvested the dividends all those years.

So when I say I do not want to give someone $20 to get $0.66 back a year what I really mean is I want to give someone $20 and get $7.52 back a year (having bought 4 shares of KO).

Whose to say what will become of funds like AOD 20 years from now. All I know is that has cut its payment twice while KO and other companies have raised their payment. When I am jobless I don't want the worry of having to rebalance my bills after having took a paycut.

Disclaimer: The investments and trades in my videos and blog entries are not recommendations for others.
I am not a financial planner, financial advisor, accountant, or tax advisor. The financial actions I talk about are for my own portfolio and money and only suited for my own risk tolerance, strategy, and ideas. Copying another person's financial moves can lead to large losses. Each person needs to do their due diligence in researching and planning their own actions in the financial markets

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