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Yield On Cost - Why It's Important & How To Calculate Yield On Cost In Your Portfolio - YouTube
Channel: Money and Life TV
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it's time for another dividend investing
video!!!! As one enters the world of
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dividend investing it won't take them
long before they start hearing the term
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yield to cough thrown around at them in
fact many investment writers think of
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yield to cost as a sacred cow yields a
cost is a very popular way to for
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investors to analyze dividend paying
assets in this video we will discuss
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what yield the cost is and the benefits
as well as the flaws associated with
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analyze investments using this method so
what is yield the cost let's start there
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yield the cost looks at the annual
dividend payout rate of a dividend
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paying security divided by the total
purchase price of the investment once
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again
yield the cost looks at the annual
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dividend payout rate of a security
divided by the total purchase price of
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an investment just for example purposes
we're gonna be using Pfizer stock
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throughout this video it doesn't mean
I'm endorsing Pfizer
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but that's just the company we're gonna
use in this example currently Pfizer the
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drug manufacturer has a yield on cost of
3.5 3% this is calculated by taking the
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total annual dividend payout of Pfizer
of $1 and 44 cents a share divided by
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Pfizer's current price of $40 and 77
cents as shown on screen so as you guys
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can see here's the formula yield on cost
is calculated as such $1 and 44 cents
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divided by the share price of Pfizer
which is $40 in 77 cents equals point
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zero three five three or three point
five three percent and of course in this
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example we're just looking at if you
owned one share of stock now that dollar
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44 dividend that's the annual payout so
realistically what you would do is you
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would receive about 36 cents of the
dividend payout every single quarter by
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the end of the year it would add up to
one dollar and forty four sets Pfizer
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pays
dividends on a quarterly basis by
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looking at Pfizer's dividend growth
history they have been increasing their
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quarterly dividend payout by two cents
per share every year for the past five
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years not bad what that really means
when you look at the dividend payout
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history is that they're roughly on
average increasing their annual dividend
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payout by five to six percent every
single year this means if we hold on to
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our one sheriff either stock that next
year our annual dividend payout of one
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dollar and forty four cents will likely
increase to one dollar and 52 cents per
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share now you might be wondering well
Mike why are you talking about dividend
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growth aren't we supposed to be talking
about yield the cost well there's a
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reason I showed you that and now you're
about to see why because as your
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dividend payout grows it affects your
overall yield to cost so now Pfizer our
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one share of Pfizer starts paying an
annual dividend of $1 and 52 cents per
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share it's gonna change up our yield the
cost so our yield the cost is no longer
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three point five 3% it now jumps up to
three point seven three percent and you
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guys can see the formula on the screen
of how to get there
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pretty cool right feels really good when
you haven't done a single thing
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differently but you get paid more the
American dream now if Pfizer keeps
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growing their dividend year after year
after year by five or six percent what
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you're gonna see is your yield to cost
the ratio is gonna keep going up it's
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gonna keep going higher and higher and
higher as your yield increases so
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eventually you're a three point five
three percent yield that we started with
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could eventually our yield the cost
could move up to five percent seven
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percent ten percent it just depends on
how long they've held on to that
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particular investment and if that
company has been able to keep growing
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its dividend payout year after year
after year by doing this calculation on
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each asset within your portfolio and by
taking a weighted average approach you
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could determine with pretty close
accuracy your net weighted average yield
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to cost in your portfolio I think this
is like really helpful if you're getting
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close to retirement after you're doing
retirement planning because by Ronnie's
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calculations you could realistically see
or calculate what you might receive in
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an retirement income just through
dividends every
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single year when you're ready to retire
it's not perfect of course nothing ever
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is but at least it will give you a rough
idea now I know yield the cost is pretty
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cool right but before you guys get too
excited about it
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let's now transition over and let's talk
about some of the flaws some of the
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weaknesses of this whole yield the cost
thing first off if we continually
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reinvest our dividends into the same
stocks over and over and over again
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which is pretty common our yield to cost
can often decrease this can happen as
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the share price of your investment Rises
but the dividend payout does not for
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example let's say we go out and buy some
additional shares of drugs shipper don't
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look at me like that
come on the company sells drugs it's
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speiser okay fine for example let's say
we go out and buy one additional share
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of Pfizer stock happy now no chipper I
could be talking about buying drugs and
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coke in the same video but no gotta keep
it clean don't want to get it to
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monetize sorry about that guys corporate
chipper is really cracking down on me
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these days but laughs let's move on with
it okay with our example so now we go
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out and we buy another sheriff Iser
stock now remember our first sheriffs
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Pfizer stock was purchased for $40 and
77 cents but now if we go out we buy
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another sheriff Iser let's say it cost
us 42 dollars and 20 cents so our
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average cost basis on these two shares
of Pfizer stock is now 41 dollars and 48
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cents if Pfizer decides not to raise
their dividend and or keeps their annual
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dividend payout at $1 and 44 cents per
share or yield on cost will actually
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decrease instead of our original 3.5 3%
yield on cost our new yield the cost
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becomes three point four seven percents
hopefully though Pfizer will be
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successful and keep being able to
increase their annual dividend payout
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each year so that our yield the cost to
keep going back up and moving in the
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right direction
quality dividend stocks provide an
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opportunity to earn higher income on our
original
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investment over time but it doesn't
happen overnight and nothing is
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guaranteed however if you have invest in
a solid company that tends to keep
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growing year after year after year it is
very likely your dividend yield on your
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original investment keeps going up which
will mean your yield the cost keeps
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going up as well let's circle back now
and talk about a few more flaws of
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analyzing the investments using the
yield the cost method now if you're
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trying to determine how safe a company's
given it is yield the cost isn't gonna
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do it for you because overall yield the
cost it doesn't take into account really
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any of the funder line fundamentals of
that particular company or business so
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it's not going to be able to tell you
how safe that company is dividend payout
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it's gonna be our dividends gonna be
when you go to retire also just because
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you have a high-yield the cost doesn't
mean you're still holding on to a good
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investment a lot of times people hold on
to bad investments just because they
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like their yield to costs but if that
investment that company keeps getting
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worse off you might eventually lose your
dividend payout altogether kind of like
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staying in a bad relationship too long
just because the relationship offers
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well you know yada yada yada
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my old boyfriend came over late last
night
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Yatta Yatta Yatta I'm really tired today
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doesn't mean you should continue to stay
in the relationship come on people what
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we don't want to happen is to lose the
principle of our investment just to hold
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on to a high yield in fact sometimes the
high yield can be a warning sign that
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the stock has fundamental issues and
it's vivid might not be safe for long I
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think a good example of this that has
occurred recently is General Electric
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stock even though General Electric was
losing market share and fundamentally
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just not doing well a lot of people held
onto their investment thinking that
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dividend payout would continue forever
but unfortunately what we still happen
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is that they basically cut their
dividend altogether General Electric has
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started moving back up but I think it's
got a long ways to go before they can
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reinstate a safe and secure dividend
unfortunately so don't get burned by an
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investment just because
you like that yield the cost all right
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the bottom line on yield the cost
Yulin cost is a fun investment analysis
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you can do to track how your dividend
yields are growing over time it may
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provide you with a rough idea of how
much income your portfolio can throw off
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to you in retirement where yield the
cost falls short is that it cannot
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provide accurate information to address
whether or not your investment is still
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relevant or if the investment is
fundamentally impaired and hold in that
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you're really holding on to a ticking
time-bomb
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and then doesn't factor and of course
yield the cost we didn't mention it
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earlier but yield the cost does not
factor in inflation through my
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observations and just from my personal
experience yield accost is a really fun
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analysis to do on your portfolio but
what I tend to focus on more what I'm
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more concerned about is one is the
company financially sound to what's the
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current dividend yield regardless of
yield the cost what's the current
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dividend yield on that investment and
three can I expect this company that I
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want to invest in to keep growing their
dividends year after year after year at
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a rate of five to seven percent or more
every single year into the future those
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are three things that I'm 10 tend to be
more concerned about than just yield a
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cost so why all means certainly take
yields of costs into consideration when
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analyzing your investment portfolio but
just I caution you to not over rely on
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it because it might lead you to making
some bad decisions in the long run it's
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cool it's fun to look at but don't over
rely on it alright ladies and gentleman
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I'm really curious of what you guys
think about all this about is yield to
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cost helpful is it not helpful why are
we not I really would love to read your
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comments down below so please feel free
to share your thoughts in the comment
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really appreciate you being here and
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watch these videos to learn about all
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this investing stuff but I do appreciate
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of your comments so I look forward to
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have a great week take care everybody
and I'll use this information to live
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your life on caged bye guys peace
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