# "Funny" Article



## Saniokca (Sep 5, 2009)

Want to make 6.54% per year? Easy - by a life annuity!

http://business.financialpost.com/2013/02/23/planning-an-income-stream-in-retirement/

My favorite quote from the article:
-An annuity purchased for $100,000 for a 65-year old man who does not smoke would pay between as much as $545.20 a month, according to Cannex, a financial services database. That works out to $6,542 per year or 6.54%. It’s a lot more than a government bond offers and more than almost any investment grade corporate bond. They are fixed commitments of large insurance companies and therefore have no market risk.

Apparently to compare a bond to an annuity only based on payments is an apples to apples comparison (who cares about the principal right?)... Oh yeah they are also "risk free"! Get them while they last!

I "love" Financial Post...


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## james4beach (Nov 15, 2012)

This is the same Return of Capital logic error that's being made all over the place with Monthly Income funds (including XTR)

You know what accomplishes exactly the same thing with lower fees? 50% XIU, 50% XBB, and you sell off some shares each year to make the 6.5% "cashflow".


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## doctrine (Sep 30, 2011)

It doesn't take long for many stocks to give you 6-7% yield. Some start at that yield, others get there within 5 years with good growth. Presto, and you don't even need to sell any shares.


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## james4beach (Nov 15, 2012)

I don't think you can "get" to a yield that high... from what I recall it's incorrect to calculate yield versus the cost you acquired shares at.


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## doctrine (Sep 30, 2011)

It's not different when you're comparing yield on cost to an annuity on $100,000 that gives 6.5%, which may never increase again. Although dividend stocks are up lately, it hasn't been that long ago since yields were high. I have Royal Bank shares purchased 18 months ago that are already yielding 5% on cost (bought at $47.90), and by Thursday will likely be yielding 5.3%. And I didn't even buy them at the low in November 2011 which was $43.40. And this wasn't the bargain of the year/one day only trade. RY traded below $50 for four months in 2011. And there are dozens more examples of this. If you're investing for retirement, common stocks are the way to go. Someone's making money on that $100k or they wouldn't offer it.


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## OptsyEagle (Nov 29, 2009)

The only problem with all this yield on cost and dividend growth and all that logic, is some time in the future, most likely a few times in your future, there will be another time when the sky is falling, yields are being slashed, and everyone, everywhere is absolutely sure things are going to get worse, including yourself.

Those are the times that an annuity is going to feel pretty good. If you do not have a guaranteed pension, large enough to cover your most basic expenses, then a small amount of your portfolio (some of your fixed income portion if you have some) invested in a life annuity (joint survivor if you like the one your with) makes some pretty good sense.

In many cases it can be the difference in allowing you to stay the course on your dividend stocks during those nasty, ugly, blood in the streets and now some of it in your toilet, kind of days.


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## Sampson (Apr 3, 2009)

OptsyEagle said:


> The only problem with all this yield on cost...


The problem is that the subscriber may be fooling themselves regarding total returns. It sounds great if your investment has a YOC of 10% per year, but what about the parallel investment that you could put money into?

Do people who use YOC metrics as investment decision success also look at the corresponding real return of an alternative investment? Probably not.

I would still take a higher real rate of return over a YOC of 50% any day. Perhaps that alternative stock has quadrupled in value during the same period the dividend has grown.


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## jcgd (Oct 30, 2011)

Ugh. My broker just informed me that he accidentally liquidated my whole dividend portfolio. I can't believe it! Even though they bought bak my whole portfolio, reimbursed all my losses and fees, and I still have the same capital and number of shares, my yield on cost just dropped from 6% to 3.2%. All those years of hard work and dividend growth down the drain just like that!!!!

(sarcasm)


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## Saniokca (Sep 5, 2009)

An annuity payout of 6.54% of your purchase price is not your YoC. You do not get the original amount back (i.e. the 100k). When you buy a government bond, you do. Hence a big part of the 6.54% comes from the principal. The author of the article portrays it as if it is the same thing.

According to my quick calculation the real yield on this annuity is about 2.75%. Suddenly that GIC doesn't look that bad huh?

From Investopedia:
The annual dividend rate of a security divided by the average cost basis of the investments. It shows the dividend yield of the original investment. If the number of shares owned by the investor does not change, the yield on cost will increase if the company increases the dividend it pays to shareholders; otherwise it will remain the same.


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## Four Pillars (Apr 5, 2009)

jcgd said:


> Ugh. My broker just informed me that he accidentally liquidated my whole dividend portfolio. I can't believe it! Even though they bought bak my whole portfolio, reimbursed all my losses and fees, and I still have the same capital and number of shares, my yield on cost just dropped from 6% to 3.2%. All those years of hard work and dividend growth down the drain just like that!!!!
> 
> (sarcasm)


Haha +1.


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## MoneyGal (Apr 24, 2009)

Saniokca said:


> An annuity payout of 6.54% of your purchase price is not your YoC. You do not get the original amount back (i.e. the 100k). When you buy a government bond, you do. Hence a big part of the 6.54% comes from the principal. The author of the article portrays it as if it is the same thing.
> 
> According to my quick calculation the real yield on this annuity is about 2.75%. Suddenly that GIC doesn't look that bad huh?
> 
> ...


It's surprising to me that an actuary (that's what you are, right?) would use any kind of investment yield calculation to describe a life annuity.


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## Saniokca (Sep 5, 2009)

MoneyGal said:


> It's surprising to me that an actuary (that's what you are, right?) would use any kind of investment yield calculation to describe a life annuity.


I don't really understand that comment - can you please elaborate?

P.S. I am not an actuary yet.


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## james4beach (Nov 15, 2012)

jcgd said:


> Ugh. My broker just informed me that he accidentally liquidated my whole dividend portfolio. I can't believe it! Even though they bought bak my whole portfolio, reimbursed all my losses and fees, and I still have the same capital and number of shares, my yield on cost just dropped from 6% to 3.2%. All those years of hard work and dividend growth down the drain just like that!!!!
> 
> (sarcasm)


That's very insightful, and a great illustration.

Your yield on dividend stocks is the income divided by current price... historical prices are not part of the equation.


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## doctrine (Sep 30, 2011)

Assuming that's a registered account, and you didn't just incur massive capital gains.


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## andrewf (Mar 1, 2010)

jcgd said:


> Ugh. My broker just informed me that he accidentally liquidated my whole dividend portfolio. I can't believe it! Even though they bought bak my whole portfolio, reimbursed all my losses and fees, and I still have the same capital and number of shares, my yield on cost just dropped from 6% to 3.2%. All those years of hard work and dividend growth down the drain just like that!!!!
> 
> (sarcasm)


+1000


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## humble_pie (Jun 7, 2009)

jcgd it seems to me that this could be an alarming situation taxwise, depending on how your broker treats their records. Not just their records to you, but the records & reports they forward to the tax authorities stating all purchases & sales by every client.

from the figures you've given, it looks like your liquidated securities might have roughly doubled during the period you held them.

if the broker sold all of them, normally speaking you'd have capital gains to declare, probably capital gains tax to pay. This would be a most unfortunate sequel to the broker's mistake.

if the broker can totally obliterate all traces of their mistake, the tax authorities will never be told that your securities were sold. If the broker can obliterate, you will not have to declare the disposition/sale of these securities. If the broker can obliterate, you will be right back to your 6% yield-on-cost.

as for the yield-on-cost vs yield-on-market debate, i for one try to keep an eye on both. Both are useful.


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## HaroldCrump (Jun 10, 2009)

humble_pie said:


> jcgd it seems to me that this could be an alarming situation taxwise, depending on how your broker treats their records. Not just their records to you, but the records & reports they forward to the tax authorities stating all purchases & sales by every client.
> if the broker sold all of them, normally speaking you'd have capital gains to declare, probably capital gains tax to pay. This would be a most unfortunate sequel to the broker's mistake.


humble_pie, jcgd was kidding :rolleyes2:


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## humble_pie (Jun 7, 2009)

really? i thought it was an early round of spring cleaning


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## jcgd (Oct 30, 2011)

Although I can't tell most of the time, I believe Humble is well aware I was kidding, but regardless he brings up a good point about the tax situation.

I was kidding though, and just making a simple point about the yield on cost. It's a single possible variable within the total return equation. 

John has a YOC of 7%
Joe has a YOC of 5%

It looks like John is the better investor.

But... 

John has been invested for 10 years.
Joe has been invested for 4 years.

Joe is now the better investor.

But...

John has grown his investements by 350% over 10 years.
Joe's investments have lost value over the four years.

Things look differently when you look at all the variables.


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## humble_pie (Jun 7, 2009)

jcgd said:


> Things look differently when you look at all the variables.


so true.

often - to me - a high yield-on-cost is a red flag indicating an old holding that has been able to grow its dividends majestically.

usually, the value of the shares has risen dramatically as well. 

so instead of saying let's-ditch-the-old-broad-&-hustle-out-to-buy-le-hi-yield-du-jour, the red flag says stop, look harder.


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## andrewf (Mar 1, 2010)

It's almost like yield on cost is not the thing to be looking at. Almost like the only thing that matters is after tax total return....


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## james4beach (Nov 15, 2012)

andrewf: sure seems like it to me. I don't think I've ever looked at yield on cost.

I still think the dividend yield (current or projected dividend payout / current price) is useful.


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## andrewf (Mar 1, 2010)

The first thing an analytical person does is to look at boundary conditions. How ridiculous does yield on cost look if I saw I bought a stock for $10 that pays out $2 per year (20%/yr), then have the share price rise to $1000 (0.2%/yr), and want to continue to hold this stock than buy the broad index, which yields 2%. The decision to continue to hold should only be based on expected future total return, not past return or yield on some forgotten cost.


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## james4beach (Nov 15, 2012)

This issue we're talking about is also mentioned in this article: The income illusion (moneysense)
http://www.moneysense.ca/2012/09/14/the-income-illusion/

Another common misunderstanding arises when investors measure their “yield on cost.” Say you bought a stock 10 years ago for $20, when it was paying a dividend of 4%, or $0.80 per share. The dividend increased 8% annually, so a decade later it’s grown to $1.73 per share. Some investors will divide the current dividend by their original cost and say their investment is yielding 8.6% (1.73 ÷ 20 = 0.086). But a stock’s true yield is its dividend divided by its current price, not the price you paid for it. Yield on cost is an almost meaningless figure that can lead investors to badly overestimate their total return.


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## doctrine (Sep 30, 2011)

Why not? That's a great example. Your income has more than doubled in 10 years. That's a lot better than an annuity that has a fixed income. It's a great way of showing someone the difference between an annuity of 6.5% and a stock yielding 4% with 8% growth. Not only is your income much higher after 10 years, if the current yield is still 4%, your capital has more than doubled as well.


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## humble_pie (Jun 7, 2009)

whoever said YOC is a deciding criterion?
it's a metric that i keep in view.
one of many.
it tells me a couple useful things.
i keep my antennae high.
i'm not a prisoner of dogma.

james long before you ever came to this forum we went through this same issue.
see that stock you're profiling
the one bought 10 years ago for $20?
the one now paying a $1.73 dividend?
that stock is now likely worth north of $42
so the 10-year return including dividends has been excellent.

plus this is a well-functioning company
one that has proven it can grow its dividend & grow its worth over time.
this is not something to throw out in the trash while trying to date mademoiselle dishy-divvy-du-jour.
instead investor wants to examine this company, in depth, very carefully.

as jcgd said, you have to look at all the variables.


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## MrMatt (Dec 21, 2011)

james4beach said:


> andrewf: sure seems like it to me. I don't think I've ever looked at yield on cost.
> 
> I still think the dividend yield (current or projected dividend payout / current price) is useful.


Personally for unregistered, I think "yield on after tax value" makes a good arguement.

For example lets say TD is at $90, you bought at $60, and it's yielding $3.60 4% today. 
Your yield is 4%.
Your Yield on cost is 6%.
If you sold it, you'd have a capital gain of $30, or about $24 after tax (20%)
Your yield on "after tax value" is 4.3%
If your ACB was $30, your Y-ATV is 4.6%

You can also adjust for the dividend tax if you want.

What I'm trying to accomplish is a way to see if I'm better off holding or selling, because quite honestly once you adjust your principal for the capital gains, you might be better off holding.

Thoughts?


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## Nemo2 (Mar 1, 2012)

humble_pie said:


> whoever said YOC is a deciding criterion?
> it's a metric that i keep in view.
> one of many.
> it tells me a couple useful things..


Agreed.....we maintain a spreadsheet that recalculates both yield on cost & current yield......an 'info purposes' thing, nothing more.


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## pwm (Jan 19, 2012)

I've managed all my investments using Quicken since around 1990, when it was a DOS app which was before MS windows. I've recorded all transactions for every security I own, from day one, and I can get "Average Annual Return" for any security with a single mouse click. Quicken uses the "IRR" formula to derive this number. I've compared this number with the Excel formula XIR and XIRR and it compares quite well. Of course it's a true statement that past performance is no guarantee of future performance but nevertheless, one need to know how ones investments have performed over time.


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