Pay Attention to Your Yield on Cost
But what matters to long-term investors is the yield based on what you paid for the stock, says Melcher. If the stock appreciates, the current yield may fall – even as the company increases the dividend. But what you’ll actually get paid from your investment will increase handsomely.
That’s why Melcher suggests keeping track of the yield based on your cost basis. Going back to the Apple example, Melcher says his firm purchased Apple stock for a client in 2006, which has gone up more than 1,100% since then. For that client, the yield on the cost basis is 20%.
The article went on to point out a couple of other good examples of yield on cost.
Home Depot (HD) has a current yield of 2.1%, but for someone who bought seven years ago, the yield on cost is 12%.
Altria (MO) has a current yield of 3.6%, but for someone who bought it 13 years ago, the yield on cost is 24%.
I went back and looked at the first handful stocks that we bought and still own for our Dividend Growth Strategy. This only goes back to 2011 but it is worthwhile to see what is our yield on cost for these 5 positions. The 5 companies I found are General Electric (GE), JP Morgan Chase (JPM), Microsoft (MSFT), Pfizer (PFE), and ExxonMobil (XOM).
General Electric (GE) cost basis is $15.07 and today’s yield on cost is 6.10%. GE yielded 3.85% based on TTM dividends when we first bought it.
JP Morgan Chase (JPM) cost basis is $32.04 and today’s yield on cost is 5.49%. JP Morgan yielded 2.5% based on TTM dividends when we first bought it.
Microsoft (MSFT) cost basis is $25.70 and today’s yield on cost is 5.6%. Microsoft yielded 2.49% based on TTM dividends when we fist bought it.
Pfizer (PFE) cost basis is $18.21 and today’s yield on cost is 6.59%. Pfizer yielded 4.4% based on TTM dividends when we first bought it.
ExxonMobil (XOM) cost basis is $70.92 and today’s yield on cost is 4.12%. ExxonMobil yielded 2.57% based on TTM dividends when we first bought it.
Obviously this yield on cost only applies to the accounts that were in our Dividend Growth Strategy from the start in September 2011. Accounts opened later will have much different cost basis for each position and different yields on cost.
JP Morgan’s dividend growth since we first bought it was helped by the fact that the Federal Reserve just started allowing them and other Banks to increase their capital returns to shareholders. One of the TTM (trailing twelve month) dividend payouts was a remnant of the Federal Reserve constrained dividends payout rules for banks.
Even over the short-time period of 4 years, the yield on cost exercise does show the power of not overpaying for a good business combined with strong dividend growth to build a rising income stream.