A pre-occupation with "yield"

[richfool]

This is something which has been bubbling about beneath the surface, for me, for a long time, and which the current situation enables me to better demonstrate my point.

I am not a HYP'er, but do generally prefer income producing IT's & stocks, and I hold some lower yielding IT's and stocks for their diversity and to help maintain some growth.

I compare the dividends/income I receive to the amount I originally invested (i.e. to my book cost) (which I believe is often referred to as yield on cost, or return on cost), and also to the current value of my holding (which I believe is usually referred to as yield or yield on value). To me what is important is the dividend income I receive, not the yield of the stock. Yield is only really important when one is buying.

In the past some have criticised looking at yield on cost (return YOC) or return on cost (ROC) whichever you choose to call it, as seeking to flatter one's income performance and have gone on to make the point, that if the capital value of the holding has doubled, then (correctly) the "yield" has halved, and therefore if one is pursuing income there is an argument for selling, taking the profit and re-investing in something else with a higher yield. I don't have an objection to that, if one chooses to do that in the sole pursuit income, but I come back to my point or assertion that the current yield is of little consequence to an existing holder of the stock.

Personally I feel that the return on cost is still very relevant. That, after all, is the return I am getting on my investment/outlay. The important thing, to me anyway, is the dividend income I am receiving, and as said above, yield is only really relevant to someone who is buying now, and less so to an existing holder. Or maybe different people are using the word "yield" to mean different things, depending on the context.

The current situation in the markets enables me to bounce back at those who advocate taking profit and reinvesting into higher yielding investments based on current yield (YOV). Suppose I have a holding that I bought some years ago which was giving a 5% dividend, and the SP has now halved in value (not an unlikely scenario currently). The effective yield of that stock is now 10%. That 10% is of no consequence to me. I am not getting a 10% dividend (on what I invested). That yield figure is only relevant to a new buyer of the stock. My return is still only 5% (on my outlay), (ignoring any possible dividend variations along the way) and that is what I should rightly be paying attention to.

[88V8]

Yes, If looking backwards... and as someone who prefers to live in the past, I do... but if living in the present, Yield at Time of Purchase is not terribly relevant, what matters is whether I could do better with the money now.

Analogy... if you were employing someone, would you rate them by their performance when you took them on, or their performance now?

So, current yield is the metric for me.

Just my pov.

V8

[Itsallaguess]

The current situation in the markets enables me to bounce back at those who advocate taking profit and reinvesting into higher yielding investments based on current yield (YOV).

As someone who considers that 'yield on cost' can often be used as a 'distorting technical comfort blanket', I wouldn't go as far as to say that having taken that view, it's necessary to then always go a step further and declare that someone using it should always 'take profit and reinvest into higher yielding alternatives'.

It's simply the case that without also considering the 'current yield' of your holdings, it's then difficult to carry out a fair comparison of 'apples' with 'apples' in terms of 'real-world options'...

Suppose I have a holding that I bought some years ago which was giving a 5% dividend, and the SP has now halved in value (not an unlikely scenario currently).

The effective yield of that stock is now 10%. That 10% is of no consequence to me. I am not getting a 10% dividend (on what I invested).

That yield figure is only relevant to a new buyer of the stock.

My return is still only 5% (on my outlay), (ignoring any possible dividend variations along the way) and that is what I should rightly be paying attention to.

I disagree.

I think the mistake you're making above is to be talking about the same share, when the majority of discussions regarding the potential for confusion when using 'yield on cost' is where both the original share (SHARE A) is discussed alongside a potential 'SHARE B' that have potentially different trajectories over time, either with regards to dividends, share-price, or often both, and hence by concentrating on 'yield on cost', an income-investor is potentially missing out on better 'real-world income-alternatives' elsewhere...

I'll try to explain a scenario when this might be the case using your own example above, but with two shares instead of one....

You purchase a share (SHARE A) for 100p, and it pays a dividend of 5p, so a yield of 5%.

In your example, you're assuming that the dividend doesn't change, and so you will 'always' achieve a yield of 5% -

SO ASSUMPTION ONE IS = You always receive 5p every year as a dividend from SHARE A in your portfolio that is currently worth 100p. (5p per 100p)

Another share (SHARE B), perhaps in the current market turmoil as you suggest, initially has a yield of 5% too, but it's share price has now halved, and the yield available now (assuming the continuation of current dividend levels..) is 10% due to that halving of the share price.

SHARE B then, was 100p as well, with a dividend of 5p, giving an initial yield of 5%, but it's share price reduced to 50p, so with a continuing dividend of 5p, this now gives a yield of 10% for SHARE B.

SO ASSUMPTION TWO IS = Anyone purchasing SHARE B today will receive a 5p dividend for each 50p share that they purchase today. Hence each 100p would deliver 2 x 5p dividends, and so 10p per year for every 100p spent. (10p per 100p)

So, in this example, the potential owner of SHARE A can either continue gaining a dividend of 5p every year for the capital invested in SHARE A, or (ignoring transaction costs for now...) they could potentially sell SHARE A, and with the 100p from each SHARE A sold, they can purchase TWO SHARE B shares. From then on, the investor would be gaining a 10p dividend for each of those SHARE A shares sold (2 x SHARE B), thus doubling their income....

By concentrating on a single 'yield on cost' figure, rather then comparing the 'current yields' of two potential options, an income-investor has the potential to be blinded by 'yield figures' that are irrelevant in the real world, and deliver the huge potential for 'opportunity cost' in missing out on potentially better homes for their invested capital....

Your example above doesn't actually cover some of the most sinister aspects of 'yield on cost', which is where an initial share purchase grows both share price and dividend, as the 'comfort blanket' can then get very warm and snuggly indeed, as shown in the example below -

1. We buy a share 10 years ago for 100p, and it paid 4p dividend then. The yield at the time was therefore 4p/100p = 4%

2. Fast forward 10 years, and the share price is now 800p, and it's paying a 15p dividend. The yield now is 15p/800p = 1.875%

3. The 'Yield on Cost', for those interested, is 15p/100p = 15%. (Sounds great, doesn't it.....)

4. The Current Yield, however, is 1.875%......(Not so good compared with any possible higher-yielding alternative we may wish to consider....)

In the above example, hopefully the huge 'opportunity cost' of an income-investor leaving that share-capital invested in a share that's only really yielding 1.875% on the currently-invested capital is fairly clear....

But still - let's shout about the '15% yield on cost' whilst grabbing that nice snuggly blanket....

Cheers,

Itsallaguess

[GoSeigen]

I come back to my point or assertion that the current yield is of little consequence to an existing holder of the stock.
[...]
That yield figure is only relevant to a new buyer of the stock

In other words, you believe that it is possible to buy a stock without anyone ever having to sell it. Magic...

GS

[richfool]

Yes, If looking backwards... and as someone who prefers to live in the past, I do... but if living in the present, Yield at Time of Purchase is not terribly relevant, what matters is whether I could do better with the money now.

Analogy... if you were employing someone, would you rate them by their performance when you took them on, or their performance now?

So, current yield is the metric for me.

Just my pov.

V8

It isn't a case of looking backwards. I am looking at what dividend income I am receiving now. The fact that the share is yielding 10% based on its current SP doesn't mean that I am receiving that 10% dividend/return. In the scenario I outlined, if I were to sell my existing holding and reinvest (in the same stock), then OK I would receive the current yield of 10%, but that would then be on reinvestment of 50% of my original investment, as I would have consolidated a (50%) loss. My point remains that the current yield is of little value to me as an existing investor who is fully invested and appropriately balanced. It's a red herring!

OK I can appreciate there is a different point that can be argued, if I had a holding that had appreciated in capital value (say by 50%) to the extent that its yield had been driven down (by 50%), and perhaps where one was overweight, and where there were other alternative investments (of an acceptable quality) paying a significantly higher yield.

[AJC5001]

In other words, you believe that it is possible to buy a stock without anyone ever having to sell it. Magic...

GS

It's called a Rights Issue isn't it?

Or IIRC Investment Trusts offer new issues to maintain their discount/premium percentages.

Adrian

[Dod101]

I would not argue that richfool is wrong; he is simply looking at yield from a different perspective from most people. I am only interested in the current yield so I use the income I have received in the last year again the value at year end. That is so that I can compare the yield I am receiving with the yield that is available from a new purchase.. If you are a true LTBH investor, that is you never ever sell then yield on your purchase price might be helpful but it will usually increase the longer you hold a share so on its own it is not really a measure of anything. I have held Imperial Brands for more than 25 years and my current holding did not cost me anything, in fact it cost me less than nothing because I have long ago extracted my original cost and more. How would he calculate yield on cost for that and what would be the value of knowing anyway?

Dod

[richfool]

Itsallaguess, Thank you for your extended presentation, which I do appreciate.

Yes, I do acknowledge your point, if one is looking at replacing one holding with another, where, for example, the price of one has doubled and the dividend yield halved and IF there is another alternative stock offering a significantly higher yield, and where it fits with one's desired asset allocation. Though in a market crisis like we have now, most stocks will have suffered significantly, if not similarly, and that scenario is only likely to arise if one is prepared to look at a different sector or even asset class.

If I am fully invested and appropriately deployed in terms of range of stocks/IT's & asset classes, - as in holding all the (hopefully) right investments, I don't really want to be messing up my asset allocation in order to sell my best capital performer(s), to pursue (buy) today's biggest faller, simply in order to pick up the highest dividend yield. I would likely be selling my best quality holdings and replacing them with poorer quality highest risk stocks. To take it to an extreme, in order to illustrate my point, I wouldn't want to sell all my holdings just to end up with everything invested in Shell, simply because it offers the highest yield currently.

Also, as far as HYP'ers are concerned, I thought their philosophy was very much "buy and hold".

[Itsallaguess]

If I am fully invested and appropriately deployed in terms of range of stocks/IT's & asset classes, - as in holding all the (hopefully) right investments, I don't really want to be messing up my asset allocation in order to sell my best capital performer(s), to pursue (buy) today's biggest faller, simply in order to pick up the highest dividend yield.

I would likely be selling my best quality holdings and replacing them with poorer quality highest risk stocks. To take it to an extreme, in order to illustrate my point, I wouldn't want to sell all my holdings just to end up with everything invested in Shell, simply because it offers the highest yield currently.

Well I think we're now heading into different territory to be honest, and at the same time conveniently forgetting that we're running an income-strategy on this board and not a capital-growth strategy, but regardless of those aspects, one clear point remains that I will maintain, and that is that no matter *what* we want to do with our current investments, be that to keep them or to rotate them (or some part of them...) into another income-related stock, then the very first thing we need to be able to do is to compare apples with apples, and to shed the 'comfort blanket' of a 'yield on cost' metric that can mentally cloud such judgements...

Also, as far as HYP'ers are concerned, I thought their philosophy was very much "buy and hold".

Up to a point, of course, but why would we allow ourselves to be blinded by useless metrics in doing so?

I'd prefer to be armed with appropriate metrics to allow me to make strategic decisions when it's right to do so, and in the second example I gave earlier, I showed where a share that saw capital appreciation of 8x over the course of 10 years might be 'showing a yield on cost' of 15% (yay!), and yet in reality only be yielding a 'real-world' dividend worth just 1.9% per year on the invested capital....(boo!).....

If a good, solid alternative could be found that might yield 6% a year, delivering three times the current income from that capital, and it suited my portfolio allocation to potentially consider it, why should that potential be blinded and denied by a comfort-blanket metric and a LTBH instruction on a set of strategy guidelines?

Why would that 6% alternative necessarily be a 'poorer quality, highest risk stock'?

Was the original share a 'poorer quality, highest risk stock' when first bought using the same method?

Cheers,

Itsallaguess

[dealtn]

I come back to my point or assertion that the current yield is of little consequence to an existing holder of the stock.
[...]
That yield figure is only relevant to a new buyer of the stock

In other words, you believe that it is possible to buy a stock without anyone ever having to sell it. Magic...

GS

I happily buy, and sell, shares without the yield being at all relevant. Why do you think it impossible for those that do think yield is relevant to be able to buy and sell shares from those such as myself. Or am I completely missing the point of what you are saying?

[richfool]

Itsallaguess, Yes, I do take your point about the opportunity cost of selling one stock, and buying an alternative stock with a higher yield.

I think the point I was trying to make was that all too often the term "yield" or "current yield" is bandied around as an indication or suggestion of how attractive a particular stock is, but it should be borne in mind that current holders of the stock are not receiving that current yield on their investment/holding; - the current yield being calculated on the current SP (and not the SP that the existing holder paid). Thus it is only really relevant to new purchases of the stock.

[richfool]

Don't get me wrong, I am not disputing the definition of "yield", but am just suggesting that it is misleading (or to me it is misleading) to use that title when talking about the income I receive from an existing investment. Perhaps this will convey what I am getting at better:

As an example, I am not sat here feeling warm & fuzzy, or congratulating myself, that the current yield on my holding of MYI has now increased to 8%, because the share price (and value of my holding) has fallen by 25%, as I am still receiving the same level of dividend income as before. The rise to 8% is a product of the fall in the SP (and in the value of my investment). I am still getting 5-6% dividend income from my investment/holding, not 8%.

Perhaps I am using or trying to apply the term "yield" inappropriately, but I focus on the actual amount of dividend income that my investment is producing/I am receiving.

[GoSeigen]

In other words, you believe that it is possible to buy a stock without anyone ever having to sell it. Magic...

GS

It's called a Rights Issue isn't it?

Or IIRC Investment Trusts offer new issues to maintain their discount/premium percentages.

Adrian

Very funny!

GS

[Itsallaguess]

I think the point I was trying to make was that all too often the term "yield" or "current yield" is bandied around as an indication or suggestion of how attractive a particular stock is, but it should be borne in mind that current holders of the stock are not receiving that current yield on their investment/holding; - the current yield being calculated on the current SP (and not the SP that the existing holder paid).

Thus it is only really relevant to new purchases of the stock.

Don't get me wrong, I am not disputing the definition of "yield", but am just suggesting that it is misleading (or to me it is misleading) to use that title when talking about the income I receive from an existing investment. Perhaps this will convey what I am getting at better:

As an example, I am not sat here feeling warm & fuzzy, or congratulating myself, that the current yield on my holding of MYI has now increased to 8%, because the share price (and value of my holding) has fallen by 25%, as I am still receiving the same level of dividend income as before. The rise to 8% is a product of the fall in the SP (and in the value of my investment). I am still getting 5-6% dividend income from my investment/holding, not 8%.

Thanks for continuing to engage with this, as I do think it's an important subject.

I understand the point you're making, and I think I need to modify the way I'm trying to make my point in return, so -

STORY A -

1A. Imagine that you don't own any income-investments, and you've got some capital in the bank earning 0% interest...

2A. You see a share that's currently yielding 5%, paying 5p on a share that costs 100p.

3A. You think this is perhaps a good investment because you're currently earning 0% on your cash, and this 5% yield income-investment suits your plans for what will hopefully be a growing income-investment portfolio.

4A. You buy the share, and the capital that was yielding you absolutely nothing (0%) is now yielding you 5%....

End of story....

STORY B -

Now, let's re-run the story again, but with slightly different parameters....

1B. Imagine you've got some capital in a share that you already own, with a 'yield on cost' of 15%, but it is currently only yielding 2% to new purchasers...

2B. You see a share that's currently yielding 5%, paying 5p on a share that costs 100p.

3B. You think this new share is a poor investment option, because your current 'yield on cost' of the share that you already own is 15%, and the 'current yield' of the alternative is 'only' 5%...

4B. You don't buy the new share, and the capital that you have invested in your original share continues to only receive a current-yield-on-capital of just 2%....


Can you now see how deceptive a 'yield on cost' figure can be to income-investors who focus on it at the expense of taking account of 'current yield' figures?

Go back and read STORY A, and recall that you thought the 5% yielding share was a good investment option because compared to your CURRENT 0% BANK YIELD, it was an improvement on your income prospects...

In STORY B, you want to forget about CURRENT YIELDS, and allow yourself to be seduced by 'yield-on-cost' figures that are irrelevant for real-world comparison purposes, and in fact are worse than 'irrelevant', because they are actually dangerous enough to stop you from making potentially good income-investment decisions....In STORY B, your capital continues to yield just 2% on capital against a potential 5% alternative investment because you refused to use correctly comparative metrics for each income-investment....

Owning an income-investment with some capital should be no different to having that capital sat in the bank.....The options you've got available to you in relation to how you use that capital for income-purposes is no different whether it's in the bank earning a 0% yield, or in an income-investment earning some other level of yield, but to fully understand what true and valid options are available when you have it already invested in a share, you really do need to be able to compare apples with apples, and hence the only good method available to do that for income-investment purposes remains 'current yield' on both existing holdings, and also any potential alternative income-investments...

Cheers,

Itsallaguess

[richfool]

Thank you, Itsallaguess for your continuing explanations.

I am not at odds with what you say, or the principle involved there. Indeed I have in the past, sold or reduced some of my holdings, for example SOI (Schroder's Oriental Inc trust) and CPG (Compass) because their capital growth had caused their yield to fall, and invested the proceeds into other higher yielding stocks. I had done similarly with Unilever, even though it was a favourite & quality holding, and I have subsequently bought back into ULVR, at a lower SP and higher yield. So yes, I do understand that concept and the principles and merit behind it.

That said, in the same way that you assert that one shouldn't pay much attention to the yield on cost (as it can be flattering & misleading), I similarly feel that to apply the term (current) "yield" to the dividend income that one is receiving on one's existing investment, is also misleading, in that an existing holder is not receiving that 8 or 10% juicy "yield" figure that so often gets bandied around, even if strictly/technically speaking that fits the definition of yield on value.

Perhaps I'm just arguing semantics (with myself) here? I'm not sure.

[88V8]

That said, in the same way that you assert that one shouldn't pay much attention to the yield on cost (as it can be flattering & misleading), I similarly feel that to apply the term (current) "yield" to the dividend income that one is receiving on one's existing investment, is also misleading, in that an existing holder is not receiving that 8 or 10% juicy "yield" figure....

Unless one compares the current yield of held stocks with the current yield of stocks one might wish to swap into, how does one make a decision about the efficient deployment of one's capital?
One cannot calculate a yield on cost for a stock one does not own.

Apples, oranges, each has merit but one would not compare them in a flower & produce show.

And anyway, to pursue your point, an existing holder is exactly receiving that juicy 8 or 10% because that is the product of the current divi vs the current value of his holding.

Where a headline misleads, I will grant you, is Fixed Interest where a Preference share or bond may for example have a headline rate of 9%, but only at par. However, equities do not have a headline rate so one is not mislead at all.

Yield on cost, nor use nor ornament.

V8

[tjh290633]

Don't get me wrong, I am not disputing the definition of "yield", but am just suggesting that it is misleading (or to me it is misleading) to use that title when talking about the income I receive from an existing investment. Perhaps this will convey what I am getting at better:

As an example, I am not sat here feeling warm & fuzzy, or congratulating myself, that the current yield on my holding of MYI has now increased to 8%, because the share price (and value of my holding) has fallen by 25%, as I am still receiving the same level of dividend income as before. The rise to 8% is a product of the fall in the SP (and in the value of my investment). I am still getting 5-6% dividend income from my investment/holding, not 8%.

Perhaps I am using or trying to apply the term "yield" inappropriately, but I focus on the actual amount of dividend income that my investment is producing/I am receiving.

Personally I find it better to fixate on the income that a share gives, rather than the yield, however you define it. The share price fluctuates for many reasons, and the yield with it.

The measure that you should consider is the amount of the dividends, and whether they are growing, static or declining.

TJH

[Itsallaguess]

That said, in the same way that you assert that one shouldn't pay much attention to the yield on cost (as it can be flattering & misleading), I similarly feel that to apply the term (current) "yield" to the dividend income that one is receiving on one's existing investment, is also misleading, in that an existing holder is not receiving that 8 or 10% juicy "yield" figure that so often gets bandied around, even if strictly/technically speaking that fits the definition of yield on value.

It's not misleading at all to apply the term 'current yield' to the dividend income that you're receiving on an existing investment.

That's precisely what you are receiving on that current investment.....

If there's any 'misleading' going on in the mind of an existing income-investor, it's when they move away from that position and start discussing Alice-in-Wonderland 'yield on cost' figures...

In a dark 'income-investment' world, a 'yield on cost' torch only lights up the ground an income-investor is actually stood on, and no further.... They get to feel 'safe' only in that they understand their own particular footing on the very small patch of ground illuminated by their weak torch... Even that 'mental safety' comes at a massive cost though, because they cannot see beyond the very small sphere of light from their 'yield on cost' torch, they are petrified to move away from their current 'safe' footing...

An income-investor with a 'current yield' torch, however, sees the whole 'income-investment' landscape, and can then very easily compare the very small patch of land that they are stood on with everywhere else around them. Having done so, they can decide where they want to go and how they want to get there with confidence, knowing that each step is fully illuminated...

Cheers,

Itsallaguess

[Itsallaguess]

Personally I find it better to fixate on the income that a share gives, rather than the yield, however you define it. The share price fluctuates for many reasons, and the yield with it.

The measure that you should consider is the amount of the dividends, and whether they are growing, static or declining.

If for the sake of this discussion we ignore 'Forecast Yield' and call it 'Current Yield' instead though Terry (and we can, for this particular discussion...), then your whole top-up process is based on that 'current yield' metric for 'comparison purposes' when deciding on possible options for topping up your HYP income investments...

Nowhere in your top-up process do you use 'dividend amounts', and nowhere in your top-up process do you use a 'yield on cost' metric...

I agree that when looking 'at income-portfolio level', it's the 'actual income' we receive from it that we should often concentrate on with regards to the 'success' or otherwise of an overall income-strategy, but that's an overall output, and doesn't deny that one of the most important 'inputs' into your actual process is 'current yield'*...

Cheers,

Itsallaguess

* which is really 'forecast yield in reality, but as stated, for the sake of this particular discussion we can and will ignore that complication...

[tjh290633]

If for the sake of this discussion we ignore 'Forecast Yield' and call it 'Current Yield' instead though Terry (and we can, for this particular discussion...), then your whole top-up process is based on that 'current yield' metric for 'comparison purposes' when deciding on possible options for topping up your HYP income investments...

Nowhere in your top-up process do you use 'dividend amounts', and nowhere in your top-up process do you use a 'yield on cost' metric...

I agree that when looking 'at income-portfolio level', it's the 'actual income' we receive from it that we should often concentrate on with regards to the 'success' or otherwise of an overall income-strategy, but that's an overall output, and doesn't deny that one of the most important 'inputs' into your actual process is 'current yield'*...

Indeed, I do use what I would call "Current Yield" in my calculation, as I place no credence upon forecasts made by others than the company itself. Dividend Amount is a necessary part of the Yield calculation, just not shown in my results. However Dividend Contribution to the total Income is used to disqualify a share from topping up. Agreed that I do not use "Yield on cost" in my calculations, although it does feature in my individual company spreadsheets, and I look at the "Starting Yield" which is the first year's dividends divided by the initial purchase price.

We have two independent variables, dividend amount per share and share price. One is fixed by the company, the other by the Market. Current yield is derived from them. My other factor is Portfolio Weight, which is a derivative of the weights of all the shares in my HYP, again a derivative of individual share prices.

Regarding the present situation, we have to assume that dividends announced already will be paid, until we have notification to the contrary. Those notifications have been coming thick and fast. Like the virus, I wonder when they will peak.

TJH