Monday, December 12, 2016
Yield On Cost
One of the most fascinating concepts of compounding interest is the concept of Yield On Cost. For those who aspire to Invest Like A Farmer it could be said that this is THE fundamental concept. Yield On Cost is calculated by dividing a company's current annual dividend payment by the original purchase price. It is expressed as a percentage; so for example if you bought Altria at $30 a share 5 years ago and the stock now pays a $0.61 per quarter dividend the Yield On Cost is 8.13%.
Yield On Cost differs from a dividend yield in that a dividend yield is the current annual dividend divided by the current share price; so in the above example of MO, the dividend yield is ($0.61 X $ =$2.44/yr divided by $66/share) is 3.69%. The significant difference here is that Yield On Cost factors in the benefits of reinvested dividends over time.
For financial farmers this is particularly important because ad believes in Dollar Cost Averaging and selecting stocks that Pay You To Own Them, the Yield On Cost is a favorite barometer over time of the true success of an investment in your portfolio.
A carefully constructed portfolio ultimately takes on a life of its own; dividends are typically paid quarterly and reinvest. Over multiple years, and even decades, these dividends provide a healthy backstop to inevitable stock market cycles and economic booms and busts; ultimately the "farm" generates recurring income that seeds additional investments which generate additional cashflow themselves and so forth. This virtuously cycle compounds and should reveal a very, very positive Yield On Cost over time.