Chowder Rule

[EricL]

(03-10-2014, 12:34 PM)hendi_alex Wrote: "yield on investment"

I keep seeing this feel good term being used as if it has some relevance at what is the current 'future date'. IMO yield on investment has almost no relevance to anything. Perhaps if such is inflation adjusted, then it gives some idea as to how an incremental purchase succeeded over time. But for the portfolio as a whole, to me, yield on investment means nothing. All that really matters, is the yield as measured against the current portfolio value or for some, all that matters is the actual amount of cash flow that is generated at a particular time and how that cash flow varies over time.

I don't mind seeing the term used, but at least for me, the term always relegates the comment to a feel good comment rather than a substantive one.

I'm still of the opinion that one could simplify this whole process by asserting that [companies which have greater than market average rates of earnings growth will outperform the general market.] As posted earlier, I'm not convinced that dividend growth stocks will out perform any companies to which the first statement applies, but they should out perform dividend stocks in general, i.e. dividend stocks that don't have as much earnings growth to support dividend increases.

The fixation with dividends, to which I'm also guilty, could be counter productive in the sense that earnings growth, margin expansion, sales growth, moat, and other metrics may be far more important. As my income portfolio continues to get funded, I'll be considering these issues much more seriously.

I understand why the term has little meaning to you as you are at retirement and relying on your stocks to produce income for you. It makes complete sense to put emphasis on current yield as that is what pays the bills.

I, on the other hand, am building a portfolio to hopefully retire on in 20 years. It matters greatly to me what my projected yield on cost for a prospective purchase is. I don't claim the chowder rule to be the end all answer on whether or not to purchase a stock, but it is a good tool to use.

I can reasonably assume, based on a 10-20 year history of consistent earnings and dividend growth along with analysts estimates for similar growth going forward, what a stock will produce in dividends alone 5 or 10 years from now. It makes it much easier to concentrate on the performance of the company over the fluctuations in share price.

If I can get a 10% yield on cost in 10 years I've already matched the returns of the S&P on dividend income alone. Any capital gains from increases in share price are just gravy on top of that.

I can control the structure of my portfolio for what dividends and to some extent dividend growth will be over the years. I can't control Mr. Market and what he's going to offer me in prices for what I hold.

I hope this makes some sense in explaining how I view DGI and the chowder rule.