# Dividend yield calculation question:



## jacofan (Apr 17, 2013)

Is it correct to calculate your dividend yield based on your original purchase price? ex. Bought stock XYZ @ $50 and it paid $3/year (6%) and then in time the stock price goes up to $100 and the dividend has followed upwards paying now $6/year. Do many people consider now that their return is now 12% ($6 dividend on their 50$ purchase price). Is there some inherent flaw with this reasoning or is that the standard way of reporting your return?


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## Nemo2 (Mar 1, 2012)

Our spreadsheet identifies both, but the one we 'use' is the yield based on the current price.


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## andrewf (Mar 1, 2010)

This is the yield on cost question. The standard method is to measure yield on current value. Some like to use yield on cost, I can only guess because it gives them a stronger pleasure response and something to brag about at cocktail parties.


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## Just a Guy (Mar 27, 2012)

Depends on if you are selling or holding. If you sell today the the yield is the return/price...this is actually more accurate when you buy. As it is the yield/cost.

In future years, I look at both. Yield on cost shows me how much my original investment is actually earning (so if my $100 is earning me $15/year I know it's earning me $15%). If the stock piece was higher, let's say $300, earning 5%, some people may consider selling, getting hit with the capital gain tax, and investing in something else that makes a higher return...

Of course, if the capital gain hit reduces your investable amount to $225, the new investment has to be earning 6.66% just to keep making me the same $15/year.

In my opinion, you need to look at both, as well as the tax implications. Remember, by not selling you are deferring taxes which gives you more earning power. Of course, you should also consider the future growth potential as well.


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## My Own Advisor (Sep 24, 2012)

Is it correct to calculate your dividend yield based on your original purchase price?

You can.

But the same game can be done for mutual funds, ETFs and other purchases.

Is there some inherent flaw with this reasoning or is that the standard way of reporting your return?

No inherent flaw, just be careful how you report your gains


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## andrewf (Mar 1, 2010)

Just a Guy correctly points out the need to consider tax implications when comparing current holdings against other prospects, but that isn't really an argument to use yield on cost as a consideration. And it is important to look at total return, not just cash yield.


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## peterk (May 16, 2010)

Focusing your mind on yield on cost could psychologically cause the investor to hold a position even if he would normally sell. Better to use current yield to get a proper picture of where your investment stands.


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## humble_pie (Jun 7, 2009)

a newer, smaller investor each: might cling to current yield, but imho this is not a good suggestion.

the 2 schools of thought on yield both have value & both co-exist comfortably.

one school says the OP's current yield in his example is still 6%. Because that's what the investment is earning in today's market, on today's terms. Investor needs to watch this metric imho.

the other school of thought looks at current yield but also identifies yield-on-cost. In the OP's example, YOC is now 12%.

this yield-on-cost number is delivering soft but precious information. Information that - apparently - the rigid current yield proponents fail to get.

YOC investors know that a stock that is able to double its share price plus double its dividend is a gold star winner. The sheer capital gains alone are rich. Such a company is likely to continue its stellar performance. YOC thus becomes a red flag indicator quickly pointing to winning stock performance. Current yield cannot show such a red flag.

many investors with high YOC stocks in their portfolio - by definition, these have all been highly successful investments - are also mindful of the time/dollar cost to themselves of portfolio management.

when a high YOC signals a top performer, the lucky owner is already familiar with the company's earnings profile, its management, its culture & its corporate growth plan going forward. If investor believes this company is going to continue to outperform, it doesn't cost any extra management time/$$ to continue to hold. Such a stock becomes a high-performance no-brainer. I have to say, if i may, that when it also has a liquid options market, it's a little piece of heaven.

on the other hand, any competitor stock with rival current yield is, by definition, a stock that the investor doesn't know. Buying such a stock requires many long hours of investigation. There's a time/dollar cost attached to this operation. Some managed funds even have quantifiable acquisition fees & costs.

the benchmark in every current yield case is the oldie but goldie which has successfully doubled both its share price & its dividend. Although it will probably be easy to find a rival stock with a higher current dividend yield, it will likely be difficult to find a rival with the same glittering history. Will that rival dividend be cut any time soon? does that rival candidate have the same smarts & the same forward outlook as the existing high YOC security that's already in the portfolio?

constantly combing the short list of rival stocks with higher dividend yields from a current yield perspective alone is a terrible waste of portfolio management time imho. A current yield analysis is too crude & simplistic imho. What investors should look for instead are soft projections such as forward likelihood of earnings & dividend growth.


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## andrewf (Mar 1, 2010)

HP, that suggests that depending on when you bought, a stock can be a good stock if you bought a long time ago at a lower price, or a terrible investment if you bought more recently at a higher price. Same stock, totally different interpretations, depending on when you bought. Yet both investors would experience the same subsequent performance if they hold.

I think there are much better things to look at if you are looking for some chicken bones that will give you some indication of how the stock may preform in future. Shareholder yield is much better than cash yield. Shareholder yield is distributions plus net share repurchases plus net debt repayment.


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## humble_pie (Jun 7, 2009)

generally speaking, lots of chicken bones are better than too few chicken bones when it comes to picking stocks, as andrew says

a thick nourishing soup is better than a thin gruel


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## Zoombie (Jan 10, 2012)

In my opinion, Yield On Cost is silly. 

You need to analyze the yield on today's prices in order to compare the investment to other stocks/bonds/funds whatever they may be. If you are only looking at an outdated YOC you cannot effectively compare the cost/opportunity of selling your investment and purchasing another investment with a different, real yield.


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## Eclectic12 (Oct 20, 2010)

So you don't see any value in knowing that you have $30 invested but for fresh dollars, you will need $68 for the same payments?

Granted ... it is only one variable to consider but I would have thought it would be useful.


Cheers


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## My Own Advisor (Sep 24, 2012)

I think yield on cost has some merit, just as long as investors don't see this as something magical to stocks alone. It applies to all other investments and can dovetail into a game of comparing capital gains.


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## Zoombie (Jan 10, 2012)

Eclectic12 said:


> So you don't see any value in knowing that you have $30 invested but for fresh dollars, you will need $68 for the same payments?
> 
> Granted ... it is only one variable to consider but I would have thought it would be useful.
> 
> ...


No, because if the investment has risen from $30 to $68 I now have $68 invested. I prefer to look at the $68 because that is what I could 'cash out' and use to generate income elsewhere.


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## BlackThursday (Apr 25, 2011)

If you want to measure capital gain (or loss) then measure it directly: Current Price - ACB
You can measure it as a % or in total $. 

YOC is simply a placebo for when stock price fluctuations unnerve you. 
It serves no real purpose in making investment decisions.


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