Does Yield on Cost Matter?

Yield on Cost is just a way of measuring the long term return of your stocks from increasing dividends. Chances are if you pick stocks that have consistently raised those dividends then you will have a winner. This is the essence of the dividend growth strategy and why yield on cost is a good indicator of future success.

YoC is not an indicator that the stock WILL continue to do well but what it has done in the past. Most of the general stock market returns come from dividends so why not invest in companies with a solid history of dividend increases?

If you measure your stock returns based on price alone then you are missing the big picture. You MUST count those dividends that have been sent into your account and grow your capital. If history repeats itself based on the company dividend record then you will receive a higher payment the next year and the year after that and the year after that.

Everytime you receive a dividend increase the return on your invested capital grows higher.

Compare this to bonds or bond ETFs. The interest payment doesn't rise month over month and your capital keeps eroding. This is what makes bonds the anti-investment to the dividend growth strategy. They are sold as a safe strategy and a parachute for your portfolio in bad times. How so? The income is stagnant and there is no growth. That's why they call this fixed income.

When you look at YoC you are looking at what the stock has done in the past and not a guarantee of what it will do in the future. So true, but what is wrong with that. That's what all investing disclaimers from investing professionals tell you. The past is no indicator of what our fund will do in the future. Yah, because we have to rely on your ability to pick the right stocks and pay for the privilege.

Let's look at how this works, from Google;

"To calculate yield on cost, divide the annual dividend by the per-share price you initially paid. ... The current dividend yield of the stock is $1 / $15 = 6.7%. But the yield on cost, i.e. the yield on your investment, is $1 / $10 = 10%. Now assume that XYZ boosts its divided to $1.50 per share."

From Investopedia;

To calculate yield on cost for a stock, an investor must divide the stock's annual dividend by the average cost basis per share and multiple the resulting number by 100 (to arrive at a percentage).

For example, an investor who purchased 100 shares of Microsoft (MSFT) on January 3rd, 2018 at the opening bell of the market at $86.06 and another 100 shares at the open on Jan. 4, 2018, at $86.59, they would have an average cost basis of $86.33/share. If the annual dividend is $1.68 per share, the yield on cost would be 1.95% ($1.68/$86.33 * 100).

The Future

This is unknown of course. In my future I will converting my RRSP into a RRIF. I currently  hold 11 dividend growth stocks, 1 US ETF and 1 Int'l ETF. I call this a core and explore portfolio. I don't have to use this RRIF for another 9 years until I have to make the minimum withdrawals. In the meantime I would hope to grow the capital and purchase more dividend paying growth stocks with the dividends I will be receiving.

I have no desire to hold bonds of any kind because I believe investing in government debt is a losing proposition. I know this from watching the holdings in my wife's portfolio go down pretty much year after year. There is NO bull market in bonds.

I find once I calculate my YoC for any stock I hold that I am less likely to sell it. If you are only focused on the current price and the current yield you only have the short term in mind and that's NOT long term investing. 

DG investors only win by playing the long game. In the short term nothing much happens.
I believe and use YoC to show me how a company has been treating it's shareholders. Has it raised it's dividend? How many years in a row? What is it's unbroken record on rising dividends?

When making a decision whether to buy the company based on this information, just ask yourself;

"Is this a good company to invest in for the long-term?"

Related Post: Why a Growing Yield Matters

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