08-19-2014, 08:20 AM
I'm glad you brought that up because I am very torn on YOC vs current yield. I like looking at yield on cost because it makes me feel good knowing that I’m now making a much higher percentage on my original investment. However, I tend to look at it like it doesn’t matter what my yield on cost is because my investment is now worth whatever the current price is and it pays me whatever the current yield is.
For example, I own WEN, 225 shares for which I paid $1008. It’s now worth $1819. The current yield is 2.47 and my yoc is 4.46. It pays me $45 per year. I’m thinking about selling approximately $1000 worth of WEN to buy MCD. If I do that I’ll have 100 shares of WEN worth about $818, still yielding 2.47% and paying me $20 a year in dividends. And I could buy 11 shares of MCD for about $1036.75 with a current yield of 3.44% and paying me $35.64 per year. If I do that, my average YOC will drop, but my current yield (and income) will increase. Instead of $45 per year, I’d be making $55.64 per year in dividend income.
I think I understand the long term argument, but assuming the price increases with the yield (leaving current yield roughly the same, but increasing my YOC), am I really losing anything by selling one position for a potentially better investment based on current price and yield? I know the dividend growth rate will make the biggest difference in how successful my investment is, but going back to the example above: WEN has a 5 year DGR of 30% (awesome), but a 10 year DGR of -13% (very bad). MCD has a DGR of 24% over the past 10 years.
I know strategy comes into play too. I think what makes me different is I don’t have a target retirement age. My goal is simply to be able to build wealth and transition from working because I have to, to working because I want to. I want to cut my hours at my day job and increase my hours doing things I enjoy (which includes flipping house for extra income). My exit strategy is basically to only sell if one of the core reasons I invested in the company changes or if I see a better investment and need the capital to buy it. Based on that, I agree that I should look more closely at dividend growth rate than current yield. Over the long term, I would expect a company that is consistently raising its dividend at a decent rate to both pay me more through dividends and increase in overall value.
So to me, I think I’d be better off selling half of WEN to buy MCD. I’d still have some exposure to the potential higher growth rate of WEN, but I’d also have what appears to be a safer investment in MCD with a higher current yield and a more consistent DGR.
Probably a bit of a newbie question, but how does YOC effect your investment decisions?
For example, I own WEN, 225 shares for which I paid $1008. It’s now worth $1819. The current yield is 2.47 and my yoc is 4.46. It pays me $45 per year. I’m thinking about selling approximately $1000 worth of WEN to buy MCD. If I do that I’ll have 100 shares of WEN worth about $818, still yielding 2.47% and paying me $20 a year in dividends. And I could buy 11 shares of MCD for about $1036.75 with a current yield of 3.44% and paying me $35.64 per year. If I do that, my average YOC will drop, but my current yield (and income) will increase. Instead of $45 per year, I’d be making $55.64 per year in dividend income.
I think I understand the long term argument, but assuming the price increases with the yield (leaving current yield roughly the same, but increasing my YOC), am I really losing anything by selling one position for a potentially better investment based on current price and yield? I know the dividend growth rate will make the biggest difference in how successful my investment is, but going back to the example above: WEN has a 5 year DGR of 30% (awesome), but a 10 year DGR of -13% (very bad). MCD has a DGR of 24% over the past 10 years.
I know strategy comes into play too. I think what makes me different is I don’t have a target retirement age. My goal is simply to be able to build wealth and transition from working because I have to, to working because I want to. I want to cut my hours at my day job and increase my hours doing things I enjoy (which includes flipping house for extra income). My exit strategy is basically to only sell if one of the core reasons I invested in the company changes or if I see a better investment and need the capital to buy it. Based on that, I agree that I should look more closely at dividend growth rate than current yield. Over the long term, I would expect a company that is consistently raising its dividend at a decent rate to both pay me more through dividends and increase in overall value.
So to me, I think I’d be better off selling half of WEN to buy MCD. I’d still have some exposure to the potential higher growth rate of WEN, but I’d also have what appears to be a safer investment in MCD with a higher current yield and a more consistent DGR.
Probably a bit of a newbie question, but how does YOC effect your investment decisions?