December 2023
I read a post the other day questioning whether yield on cost really matters? Someone answered the question with the following:
“You’re still getting the same payout whether your yield on cost is higher or not. It’s obviously great if your shares increase in value but having a higher yield on cost doesn’t really affect your dividend income.”
This person is thinking only about the share count, which actually has nothing to do with yield on cost. To calculate the yield on cost, you take the dividend and divide it by the purchase price per share.
Yield on cost has nothing to do with the amount of shares you own, but rather, it has everything to do with what you pay for those shares, and I can tell you that a growing yield is important to an income investor.
“Growing” being the key word.
Let’s take a look at one of the companies I cover in my chart to see how its yield on cost has varied over time.
Fortis/FTS.TO:
The chart above shows the annual dividend, the year end share price, and the yield every year from 2013 to 2023. You’ll notice the steady dividend increases over time, going from $1.24 in 2013 to $2.36 today.
Now, look at the yield more closely. You can see that it hasn’t fluctuated much over the last decade with the average yield being 3.64%.
What does that tell us?
Well, it tells us that not only has Fortis increased its dividend annually, but the share price has risen in conjunction. This results in a dividend yield that stays pretty consistent over time.
Don’t let that steady yield fool you. If you were to buy Fortis today, you’d reap a 4.27% yield, but if you had purchased Fortis in 2013, your yield on cost would be sitting at almost 7.4%. You would be earning 3% more on your investment than someone who purchases Fortis today.
Going back to the quote at the start of this post, do you still believe “having a higher yield on cost doesn’t really affect your dividend income.”?
Of course it does!
Let’s take another look, in case you’re still not convinced:
It’s 2013 and you have $10,000 to invest and you purchase 326 shares of Fortis. You will receive roughly $404 in dividend income based on an annual dividend paid of $1.24. If you keep those 326 shares and never add to them, your income will grow by over 90% to $739.36 in 2023. Don’t forget, you paid $10,000 for that investment that is giving you $739 annually. That’s a 7.39% yield.
Now let’s pretend that today, November 28, 2023, you’re looking at starting a position in Fortis. You have $10,000 and buy 181 shares (based on the current share price of $55.23). Your annual dividend from these 181 shares will be $427.16. Since you paid $10,000 for this investment, your yield is 4.27%.
Same investment ($10,000) but two very different incomes and yields.
Some of you may say $10,000 in 2013 isn’t the same as $10,000 today. Ok, let’s add inflation to the mix.
That would give you a value of $12,600 to spend today, which would buy 228 shares with an annual dividend of $538.08. That’s still $200 away from the $739.36 and 7.4% yield you’d have if you purchased these shares in 2013.
Wouldn’t you want a growing yield on that investment? I would.
A growing yield does matter. What also matters is a growing price.
Look at Fortis’ CAGRs for dividend and price in my monthly chart that follows. You’ll see they are closely aligned. Those are the companies a dividend investor wants to own. The dividend goes up over time, raising your yield on cost, as does the price. Not only are you earning more from your initial investment, but you also have share price appreciation over time.
Side Note: As I’ve spoken about yield on cost, please don’t think I’m promoting this as an analysis tool to determine what companies to buy. Yield on cost should be used in conjunction with many other metrics, such as the ones I provide in my monthly chart.
Higher yielding stocks should be critically reviewed. You can find many covered-call ETFs that provide yields over 15% or more. These are ones that I personally avoid. They don’t provide the two scenarios I mention above: 1) a growing dividend, and 2) a rising share price over time. (the CAGR analysis).
Use this information as you like, but remember, the information presented in my newsletter is based on my own personal opinion and should never be construed as advice. Please do your own research.
Our November Dividend Income
This month we earned $1,549.24 in dividend income. November is one of the lowest earning months for us.
We earned dividends from AT&T, BMO, CJ, DIV, EMA, EXE, FRU, GXE, PEY, SGY, RY, and WCP.
This month, Enbridge announced a dividend increase from $3.55 to $3.66 starting with the March 2024 payout. This means the yield on Enbridge is currently sitting at almost 8%. Is it sustainable? Ninety-percent of the analysts on BNN think so. For me, ENB is a long-term hold.
In addition to Enbridge, BNS, RY and TD have come out with dividend raises this week. These have pushed our forward annual dividend income to almost $46,000 for 2024, which means we are close to reaching our goal of earning $50,000 annually from dividends.
Come January, our TFSA contributions will help us get a bit closer to that $50,000 goal and I know people say Christmas is the best time of the year, but January is pretty great too with that TFSA room opening up.
For 2024, it has been set at $7,000.
Here are the historical limits.
This means, if you were 18 or older in 2009, your total contribution limit would now equal $95,000.
What are you hoping to buy in your TFSA in the new year?