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Yield on Cost
#1
What is your view on Yield on Cost? I call it Yield on Investment (initial purchases, dividend re-investment and additional purchases).

That's what I consider my real return on my investment and don't even try to match my return to the market or any index.
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#2
I think YOC is a useful tool in following your progress or projecting future returns when researching for long term investments but can cause problems when used it to determine whether to hold or sell a position. For example, continuing to hold a stock just because its YOC is higher than an alternative investment's current yield.
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#3
I've never been a fan of YOC. All it tells me is how much income I'm earning off of my initial investment. Well since making that initial investment the market has most likely gone up and I have quite a bit more capital. All I'm concerned about is current yield. How much income am I recieving compared to the current market value of the investment. I can then compare current yields across different investments to see if I may want to consider switching investments.

I don't want to get emotionally involved with a stock because I have a yield on cost of 10% while it's currently yeilding 3%. All that tells me is that I made a great decision to buy back when I bought it. Doesn't tell me anything about future prospects. I especially like to keep this in mind when thinking about my future portfolio.
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#4
(09-23-2013, 04:19 PM)Dan Mac @DGSInvesting Wrote: I've never been a fan of YOC.

Here's a comment from a financial advisor who agrees with you (its a bit long, he must like to hear himself talk).

Would be interested to hear how many other members agree with you?

http://www.retailinvestor.org/truths.html#yoc
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#5
I'm with Eric and Dan on this one. I do track my YOC, and consider it a "fun" metric to give me a different perspective on how my investment decision is playing out. But I absolutely agree that it is so easily misunderstood and that it can lead to bad decision-making if it is given too much emphasis.

For example, I've got some shares of JNJ with a YOC of 5.56%. That's a great number, makes me happy. But it is NOT a good reason -- in itself -- to hold the shares. Especially from an income perspective. Regardless of yield on cost, those 50 shares bring me $164 in annual income. But, at today's price of $88.66, I could sell those 50 shares for $4433, invest it in, say, COP, and immediately turn it into $173 in annual income. Or in T and turn it into $234 of annul income. You can only do these comparisons by looking at current yield. As Dan stated, the current value of your capital matters in making good decisions about your portfolio.

Now of course, all of this matters less if you generally plan to buy and hold forever, which many dividend growth investors do. But even so, while I think YOC is a fun metric, it is important to understand its limitations.
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#6
I'm in the same boat. The longer you hold a stock the greater the YOC will be. Some of my PM stock has a YOC over 10%. While nice to see, not really applicable to what I'm receiving today. Hopefully some of my holdings will eventually have a YOC of 100%. Placing too much weight on YOC would cause me to never sell my oldest holdings because the % is too high.
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#7
Remember for YOC I'm including all additional purchases and re-invested dividends in the same stock, not just the initial cost. That's why I call it Yield on Investment.

If you sold there would be commissions as well as taxes on gains. When you buy again there will be a commission and only the hope that the new buy will provide the same growth and ROI after taxes and fees.

Ask any businessman how they evaluate earnings. It's the return on their investment.

(09-24-2013, 09:58 AM)ChadR Wrote: Placing too much weight on YOC would cause me to never sell my oldest holdings because the % is too high.

As mentioned above, if your yield on investment is high, why would you want to sell, especially if the company keeps increasing the dividend and making your YOC even higher. You'd be increasing your income without having to do any work, just sit back and let it grow.

If all your future investments did the same thing, you'll retire happy with hardly any effort.
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#8
A hedge fund friend of mine told me that YOC was silly.

Its what you can make NOW, if you invest in it.

That GE example of 3% is a case in point.

If I can earn 7% NOW, what good is it if my YOC is 7%...I cant spend that YOC
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#9
I don't think that YOC is useless, and I do keep track of it for my purchases. It is a reasonable way to keep score, if nothing else. But I agree with most of the folks here that it is easy to be misled by it, and that it should not be used to inform new decisions about a position.

But if I understand what you are saying here, cannew, you are not really talking about yield on cost, as typically defined (current dividend divided by purchase price). It is unclear to me from your posts if you are including in your assessment capital gains, but assuming so, then I think you are really talking about a variant of total return, which I suspect most here would agree is a very useful metric. You just happen to label it something close to "yield on cost."
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#10
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.
Alex
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