09-24-2013, 09:27 AM
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.
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.