08-24-2014, 11:03 AM
Have you considered your taxes when you sell the stock?
If you are trading in an account that has tax benefits where you won't ever need to pay the taxes on capital appreciation than sure, current yield is what important more.
In a taxable account where you need to pay taxes you need to do a lot more calculations and figure out how much your are getting on a "yield after capital appreciation taxes" before you sell a stock that pays 3% today to buy another that pays 3% (or even 4%) today.
Don't forget commissions for the buy/sell as well.
Let's work with the numbers:
Consider buying stock XYZ for $1000 getting payed $30 which is 3% yield.
After X years the stock is worth $2000 and you are getting payed $60 which is 3% yield (or 6% YOC).
Now lets calculate what is the yield that we are getting on actual capital.
***NOTE: I'm going to assume 25% capital appreciation tax (because that's what I'm paying)
If I sell the stocks for $2000.
I pay sell commission for 1$ (multiply this by whatever your broker is stealing from you).
I pay taxes for 1000*0.25=$250
In total I got 2000-250-1=$1749 for the sale.
My purchase commission is going to be $1 as well so I have 1749-1=$1748 to work with.
Now I need to find a stock that pays $60 for $1748 - this is 3.432% yield instead of the "3%" yield I'm getting now for XYZ.
So in order to break-even (dividend wise) I need to get a company which:
1. Pays more dividends today.
2. Has at least the same if not better future dividend growth.
3. Has at least the same if not better future growth and stability.
Is that impossible? No.
Is that hard? Maybe.
Is that worth the effort? In my humble opinion it usually doesn't
PS
If you don't pay capital appreciation taxes or commissions than you only need to compare the companies themselves and my entire post is non-sense.
If you are trading in an account that has tax benefits where you won't ever need to pay the taxes on capital appreciation than sure, current yield is what important more.
In a taxable account where you need to pay taxes you need to do a lot more calculations and figure out how much your are getting on a "yield after capital appreciation taxes" before you sell a stock that pays 3% today to buy another that pays 3% (or even 4%) today.
Don't forget commissions for the buy/sell as well.
Let's work with the numbers:
Consider buying stock XYZ for $1000 getting payed $30 which is 3% yield.
After X years the stock is worth $2000 and you are getting payed $60 which is 3% yield (or 6% YOC).
Now lets calculate what is the yield that we are getting on actual capital.
***NOTE: I'm going to assume 25% capital appreciation tax (because that's what I'm paying)
If I sell the stocks for $2000.
I pay sell commission for 1$ (multiply this by whatever your broker is stealing from you).
I pay taxes for 1000*0.25=$250
In total I got 2000-250-1=$1749 for the sale.
My purchase commission is going to be $1 as well so I have 1749-1=$1748 to work with.
Now I need to find a stock that pays $60 for $1748 - this is 3.432% yield instead of the "3%" yield I'm getting now for XYZ.
So in order to break-even (dividend wise) I need to get a company which:
1. Pays more dividends today.
2. Has at least the same if not better future dividend growth.
3. Has at least the same if not better future growth and stability.
Is that impossible? No.
Is that hard? Maybe.
Is that worth the effort? In my humble opinion it usually doesn't
PS
If you don't pay capital appreciation taxes or commissions than you only need to compare the companies themselves and my entire post is non-sense.