MDW1954 wrote:
Obviously, if you compare two shares, one yielding 5% and one yielding 10%, then the opportunity cost of holding the one yielding 5% is that you won't be earning the 10% that the other share offers.
On that basis, you switch.
But that 10% yield tells you nothing about how dependable that 10% might be going forward, how fast the dividend might grow, and whether the 10% is predicated on a falling share price or a rising dividend.
I'm sure you've not done it deliberately, but I think using a 5% yield and a 10% yield in your example above might be a bit of a red-herring here, as it intuitively makes us question the 'safety' of the potential alternative income investment, and that's not going to be helpful in determining why 'yield-on-cost' is such a deceiving metric for people to want to use.
To align more with the point that Julian has raised, I think it would be more appropriate to consider the following two options -
1. A current 'single-share' HYP component yielding 5%
2. A potential alternative 'collective investment' income-investment-trust yielding 5%
If we ignore, for now, any talk of 'yield-on-cost' at all, I think the main point being made here is to raise the potential for moving a lump of invested capital from a 'single company' income source to a 'collective investment' income source, and thus maintaining the 5% yield (and hence maintaning the income
from that capital - excluding costs of course...), but at the same time removing a 'single point of failure' component in our HYP's, and replacing it with a more diversified 'collective investment', which by the way comes with it's own income-reserve...
In terms of 'dependability', I would like to think that most people might see the 5% yield coming from an income-oriented investment-trust as being at least as dependable as the single-company investment, and probably more so in general terms. This is the main point that's been raised earlier - reducing HYP risk whilst maintaining income.....what's not to like?
Would you agree that changing comparable yields in my example above goes some way to justify such a switch?
MDW1954 wrote:
I find bought cost yield to be a simple rough-and-ready proxy for dividend 'quality'. A high bought-cost yield tells you a lot about the hard-cash pounds and pence that you are receiving today, versus the less tangible income that you might receive when you switch.
I'm not quite sure where you're getting this 'less tangible' income from here. If it's because in your example you're moving from an investment with a 5% yield into one with a potential yield of 10%, then I'd agree that we might begin to question such tangibility, but we're not using such yield-moves in our earlier discussions, as we're really discussing moving from single-company investment yields that are currently more or less aligned with the yields available from collectives, so again, I think raising a doubt regarding any 'tangibility' of yields is another red-herring.
MDW1954 wrote:
A high bought-cost yield is the reward for being a LTBH investor -- otherwise, we would all be merrily switching into higher-yielding shares all the time, gradually trading away dividend stalwarts for shares in Carillion, Centrica, and other dubious propositions.
And this is exactly why I think 'yield-on-cost' is such a truly dangerous metric.
I've said in the past that it can be held as some sort of 'comfort blanket' by a LTBH income-investor as a metaphorical 'pat on the back', and I think allowing ourselves to do this
when in reality we might actually only be seeing a 'true yield' on invested-capital of a much, much lower-scale than the 'yield-on-cost' figure we might be holding on to, goes some way to explain where the real danger lurks....
You mention '
less tangible income' when discussing a potential alternative investment, but in my mind, the '
much less tangible income' is the income you've convinced yourself that you're getting when viewing an 'imaginary yield-on-cost' figure, and not the 'tangible alternative' that we might look at as a much better option for a particular lump of investable capital when we properly compare potential options using true yields that are available today, and not comparing them with some historical artefact yield-figure that bares no comparison to the
actual income being taken from the currently-invested-capital....
Yield-on-cost really is the '
much less tangible' metric because it's not
actually a real yield of any sort.....
Cheers,
Itsallaguess