gbalin wrote:To answer your question. I would hope that you are alone in your thinking because as fisher says, the purchase yield has got nothing to do with it. It is the current price and yield that matters not what you paid.
Dod
Can anyone enlighten a longtime lurker and investing newbie? I can understand that it is the current yield that can be compared with other investments, but as a matter of principle in maintaining a HYP, should it not be the purchase yield that is kept in mind? eg I bought 10K of CPI because I liked the yield and reckoned the company was a 'keeper'. Then the price dropped by nearly 50%! However, I am still getting the yield so I should just keep my original aims in view, surely?
No, you're not still getting the original yield. You are getting the original income, but "income" and "yield" do not mean the same thing. Yield is income divided by capital value, so it's perfectly possible for the income to remain the same and the yield to change - it just requires the capital value to change, which for typical HYP shares is generally something that happens just about every minute of every trading day!
Looking at your example of Capita (CPI), I'll assume for the sake of an example with simple numbers that you bought it at a price of 1000p sometime around April 2016. So you got 1000 shares for your £10k, and on the historical dividend of 31.7p declared in February 2016 had annual income from the holding of £317. Your historical yield at the time was £317/£10k = 3.17%.
Towards the end of 2016, the share price plummeted to around 500p, so the capital value of the holding dropped to about £5k. The historical dividend from the shares was still 31.7p and so the annual income from the 1000-share holding was still £317 - but the yield was then about £317/£5k = 6.34%.
Now the share price is 691.5p and so the capital value of the holding is £6,915. The company held its dividend at 31.7p this year, so the annual income is still £317 - and the yield is now £317/£6,915 = 4.58%. You've had the same income throughout, which I think is what you're trying to get at, but the yield you've been getting has been varying dramatically as a consequence of the share price also varying dramatically.
An important difference between income and yield figures is what they're most useful for. In a nutshell:
* Income figures are most useful for seeing how you're doing while you're holding shares - your unchanged CPI income correctly reflects your feeling that you're "still getting the yield", it's just not the right word to describe it (*). Incidentally, dividend-per-share figures usually give you essentially the same information as income figures - but some corporate actions such as share splits / consolidations and rights issues require them to be adjusted to make the information match up completely.
* Yield figures are most useful when talking about buying and selling decisions. The fact that your CPI holding has a yield of 4.58% says that if you were to sell it and use the proceeds to buy another share, that would increase the income you were getting from your HYP if the other share had a yield above 4.58% and decrease it if it had a yield below 4.58% (**). E.g. if you were to sell the Capita holding, you would have £6,915 to spend on something else. If you spent it on a replacement which yielded 4%, you would have £276.60 income from that holding - less than the £317 you were receiving before - and if the replacement instead yielded 5%, you would have £345.75 income from the holding - more than it. The holding's current yield of 4.58% correctly tells you about that - its previous yields of 3.17% and 6.34% don't even come close...
So basically, judge holding by what has happened to the income while holding; judge trading decisions by the yields.
(*) And to be fair, you saying that you're "still getting the yield" when you mean "still getting the income" isn't really all that much of a problem - it's a common enough mistake and people will generally see what you mean. The real problem occurs when you extend that mistake to your understanding of what other people are saying - in this case, people are discussing selling HSBC in order to buy other shares with the proceeds, i.e. trading decisions, and so they really do mean "yield". If you read that to mean income, you will misunderstand them!
(**) Well, actually it's slightly different from that due to the effect of trading costs - but I've been ignoring those in this post to avoid unnecessary obfuscation of what's really going on!
Gengulphus