Wednesday, February 21, 2024

Yield on Cost is a fascinating metric

Yield on Cost is a fascinating metric. It calculates the dividend yield based on the original cost at the time of purchase.

Yield on cost is calculated by dividing the dividends received from an investment over the cost paid for the shares.

I view yield on cost as a forward looking metric.

It combines my yield and growth expectations into a certain amount of dividend income at a future point.

It's fascinating to see in action, anytime you buy a security. It get's me thinking about the current yield, growth in earnings per share, dividend safety, valuation.

For example, Home Depot (HD) sold for about $80/share ten years ago and had a trailing annual dividend of $1.56/share.

The dividend yield was paltry at around 2% back then.

Some investors could have ignored Home Depot, because of its "low yield", in favor of other higher yielding companies. Mostly to their own detriment.

However, they missed out on the potential for future dividend growth.

Fast forward to today, Home Depot is on track to pay $9/share in annual dividends. 

This brings the yield on cost at over 11%.

That's a better yield and dividend income that would have been achieved by investing in a company that yields say 5% or 6%, but which never raised dividends by much.

As I said above, I view Yield on Cost as a forward looking metric. 

It looks at current dividend yield and accounts for future estimated dividend growth.

There is a trade-off between dividend growth and dividend yield

Taking a look at Yield on Cost definitely puts things in perspective.

What's even more fascinating to me is that even The Oracle of Omaha, Warren Buffett himself, has discussed the concept in his letters to Berkshire Hathaway shareholders. The last mention was just last year, when he discussed his investments in Coca-Cola and American Express. Please see below: (Source)

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