10-09-2013, 07:53 AM
(This post was last modified: 10-09-2013, 07:55 AM by hendi_alex.)
I'm unchanged on this one. YOC is a meaningless, feel good metric. Doesn't hurt to calculate, when feeling a little blue and wanting to pat yourself on the back. But the calculated value has no inflation adjusted basis, therefore is an apples to oranges kind of comparison. It has nothing to do with current values and yields on investment, which is where today's investing takes place. A person could hold an under performing dog for ten years and then pat themselves on the back because YOC is 8% or 9%, but with that YOC of 9%, the purchasing power could have been cut in half over the period. Also as others pointed out, the market yield may be 2% and in the current market where there happens to be very attractive alternatives. The person who is living too much in the glow of YOC may never even consider swapping the position out for a replacement that has much more solid forward prospects.
Further, what really matters for income investors is the current portfolio income stream and secondarily the portfolio NAV. Neither of those numbers has anything to do with this so called YOC except as the capital is valued today.
I used to routinely calculate my YOC, even having a cell for it in my spreadsheet. Others helped me see the folly of my feel good activity, so other than an occasional glance, I never pay attention to such in more.
One maxim of investing is [never get married to a stock]. Just because the issue has been held for a long time, and it has a good YOC, doesn't mean that it represents the best holding going forward. Always reassess, at least yearly. That is a good time to rebalance the portfolio or to make other changes in one's holdings.
I also have an issue with dividend reinvestment, unless the shares are bought at a significant discount. It makes no sense to me for a person to opt for dividend reinvestment because those accumulations would rarely come on a day that, if holding investment cash, you would have decided to buy shares of that particular company. So if you would not put fresh cash into shares on that day, why have buy them with dividend cash. IMO it is much better to let the dividends accumulate, and then make a well considered investment with the money. If the reinvestment shares come at a 5% discount, then perhaps that would tip the scale toward direct investing with the dividends.
Further, what really matters for income investors is the current portfolio income stream and secondarily the portfolio NAV. Neither of those numbers has anything to do with this so called YOC except as the capital is valued today.
I used to routinely calculate my YOC, even having a cell for it in my spreadsheet. Others helped me see the folly of my feel good activity, so other than an occasional glance, I never pay attention to such in more.
One maxim of investing is [never get married to a stock]. Just because the issue has been held for a long time, and it has a good YOC, doesn't mean that it represents the best holding going forward. Always reassess, at least yearly. That is a good time to rebalance the portfolio or to make other changes in one's holdings.
I also have an issue with dividend reinvestment, unless the shares are bought at a significant discount. It makes no sense to me for a person to opt for dividend reinvestment because those accumulations would rarely come on a day that, if holding investment cash, you would have decided to buy shares of that particular company. So if you would not put fresh cash into shares on that day, why have buy them with dividend cash. IMO it is much better to let the dividends accumulate, and then make a well considered investment with the money. If the reinvestment shares come at a 5% discount, then perhaps that would tip the scale toward direct investing with the dividends.
Alex