While clearing out our basement recently we came across some papers that deserved some reflection, my husband’s old TFSA statement from 2011. Take a look:
The account held a GIC with an interest rate of 1.15%. By nature, people are risk-averse, and he was no different. The fear of losing money is what often drives people to invest in what they believe is “safe”. Although you won’t lose your initial investment when purchasing a GIC, you can lose buying power over time.
“Investing, as we do, in well managed companies is not aggressive. It’s enlightened. Mr Munger: “The big money is not in the buying or selling but in the waiting”. What are we waiting for? The growing yield. The growing income from companies is wealth. It takes a while to get your portfolio yield up there, but once it’s producing, WOW! Hang in. Be patient. Dividends are powerful, eventually. Can you wait? You must wait. Control your behaviour.” - Tom Connolly @ Dividendgrowth.ca
As Tom says, it’s the growing yield that’s important.
There are many people that believe yield on cost is meaningless. That it’s a worthless metric that deserves little to no attention. Just recently someone on Twitter said:
You can absolutely go out today and buy the same positions as someone else and earn the exact same dividend income, but what’s missing from this Twitter post is the fact that you will likely pay significantly more for that income than they did.
Here’s an example:
Whitecap Resources. We bought WCP in 2021 and our average book cost is $5.00. Our yield on cost is now over 14%. If you were to buy this company today, its current yield is 7%. What’s more, at time of writing, their shares are trading at the current price of $10.44.
Sure, you’ll earn the same dividend income as me, but the difference lies in the price you and I have paid for the shares. I paid $5 and you will pay more than double to earn the identical income.
Doesn’t it tell us something about our returns?
Of course it does.
“YOC is an essential metric for investors, particularly those seeking long-term income from their investments. Here's why it holds such significance:
A) evaluating Long-term Income Potential: YOC helps investors assess the income-generating potential of an investment over the long run. By considering the original investment cost, YOC provides a clearer picture of the actual returns, especially when compared to the current yield, which may be influenced by short-term market fluctuations.
B) Tracking Dividend Growth: YOC takes into account dividend increases over time, allowing investors to track the growth of their income stream. This is particularly important for dividend growth investors who aim to build a portfolio that generates increasing income year after year.
C) Identifying High Yielders: YOC enables investors to identify high-yielding investments that may have been overlooked by the market. Stocks with a low current yield but a high YOC could indicate that the company has consistently increased its dividend payout, making it an attractive long-term income investment.” fastercapital.com
As companies increase their dividends, your yield goes up. You are therefore earning more money on your investment. If they continue to increase the dividend annually, you are earning more and more on your investment. This doesn’t even take into account any price appreciation for the shares you own. How can anyone think a growing income is meaningless?
The price you pay to own the shares determines your YOC, that’s why I like to buy companies that appear undervalued (based on the Graham Number - see my analysis chart later on). Hopefully, they will continue increasing their dividend annually, growing my income and therefore my YOC will go up.
Set up a spreadsheet of your own and study your income growth over time. What is your YoC for the positions you hold? It’s amazing what a little tracking will tell you.
Our April Dividend Income
This month, we earned a total of $5,473 in dividend income.
Here it’s broken down by tax-type: