richfool wrote:Itsallaguess wrote:To give an example of this, if a particular share purchase yields 6% initially, but over a couple of years the share price perhaps doubles, whilst the dividends paid might perhaps remain static, then an income-investor who still thinks they have a 'locked-in yield' of that original 6% on the currently invested capital might well be quite disappointed were they to discover thst the 'true yield' they were currently achieving on their share capital was actually only 3%.....
I am playing devil's advocate here, so please indulge me. I am trying to get my head round the opposite situation to the one you and others often point out and also be consistent.
So how then do you (or HYP'ers) view the situation if over that couple of years the share price of that particular share halves (instead of doubling)? Based on your scenario above the
true yield then becomes 12%? But the investor isn't getting 12% on their investment (their original stake), are they? ....though I suppose you/HYP'ers would argue they are getting 12% on what's left of their investment? Is that how you view it?
Basically, it's how not just HYPers view it, but how everyone with a grasp of financial realities views it. You put e.g. £10k into the holding a couple of years ago, and you're getting £600 (6% of £10k) income from it. Now the holding is worth £5k, and if you're still getting £600 income from it, that's 12% of what the holding is worth. One can think of the holding as still being worth £10k if one wants, so that the yield as one sees it is still 6%, but the financial reality is that it's currently worth £5k and the yield is 12%.
The real point is that yields only really matter to one's investment decisions when one is buying or selling shares, or contemplating doing so. At other times, it's only the income that matters: as long as one isn't buying or selling or even thinking of doing so, the relevant considerations are just that one's income from the holding is £600 and the chances of that income growing, staying the same or reducing. It's only when one starts thinking about topping the holding up or trimming it that the ratio of the change the trade might make to the income to the amount of cash one would need to put into the trade or could take out of it (i.e. the yield) becomes directly relevant.
I say "directly relevant" rather than just "relevant" because one might use the yield indirectly as a hint about what might happen to the income - an exceptionally high yield as a hint that the income might be in danger of being reduced, or an exceptionally low one that it might be likely to be significantly increased. That's a bit pointless unless one actually contemplates doing something about it - but it might very reasonably be used as a hint that one should
start considering doing something about it. (But I'm much more doubtful about using it as more than that, i.e. as an indication that there
is something that needs doing rather than just that it's worth
considering whether there is such a thing. In particular, I think that letting oneself think of a very high yield as meaning that there
is something wrong with a company's prospects is a bad idea, because it essentially involves following what a consensus of other investors are doing and (a) part of the point of choosing one's shares oneself is not to do that; (b) other investors have most certainly been known to misjudge companies' prospects, even in large enough numbers to form or strongly influence the consensus; (c) other investors may be strongly influenced by things other than company prospects - e.g. consider Woodford's recent/current difficulties, which essentially involve forced sales and are at least strongly suspected of having driven some shares' prices down.)
Anyway, that's basically how I view it as a HYPer - I care about the yield when buying or contemplating buying because it indicates how much extra income I'll be getting for my money, I care about it when selling or contemplating selling because it indicates how much income I'll be giving up to get the money, I might occasionally happen to spot an unusually high or low yield at other times and decide to investigate what lies behind it (but certainly don't systematically look for such yields), and otherwise I ignore yields and just pay attention to income. I can't speak for other HYPers, of course, but it is an attitude I recommend to them.
Gengulphus