Dividends uncovered: Getting to grips with ‘yield on cost’

Julie Brownlee, Fsp Invest, 05 Jan. 2015

Tags: yield on cost, dividends, dividend, dividend yield, what is yield on cost, using yield on cost, income investors,



If you invest in dividend paying shares for income, the dividend yield is an important figure.

But there’s something else that you should also consider. That is ‘yield on cost’.

So what is yield on cost? How can you calculate it? And how can you use it?

Read on to find out…



Investing for dividends


If you’re an income investor, you’ll no doubt be familiar with the dividend yield.

To calculate the dividend yield you divide the current dividend per share by the current share price.

For example, Company ABC pays a dividend of 40c. Its share price is 1,000c. That gives it a dividend yield of 4% (40c/1,000c).

If a company is successful, its profits and dividends should grow over the long-term.


How to calculate yield on cost


Going back to our example, if Company ABC grows its dividend for ten years by 5%, at the end of year ten the dividend will be 65c.

So if you’d bought shares at 1,000c ten years ago, your yield on cost would now be 6.5% (65c/1,000c).

The yield on cost tells you the dividend return as a percentage of the price you paid for the shares.

The yield on cost calculation is useful if you’re investing for income. It allows you to weigh up different income investment opportunities.


How to use yield on cost


Let’s say Company ABC has company bonds that pay an interest rate of 5% today. It also offers a dividend yield on its shares at 3.5%. Analysts expect dividends to grow at 10% annually.

Weighing up these two income investment opportunities, the bond may look more attractive as you’ll get a higher income at first.

But the interest rates on bonds stays the same throughout the life of the bond.

If you buy the shares instead, the dividend yield is lower than the yield off the bond to begin with. Yet after four years of 10% dividend growth, the share will pay you a higher income on cost than the bond.

Of course, there are no assurances that the dividend will continue to rise 10% a year.

So there you have it, getting to grips with yield on cost.

*********** New release ************

Discover how to free up R2,640 every month you didn’t know you had!

Imagine having an extra R2,640 in your pocket without sacrificing your lifestyle in just eight days!

That’s a whooping R31,680 in the next 12 months – And, you don’t have to cut back on luxuries, start your own business or invest in high-risk schemes that never pay off!

Click here to find out the secrets you can put to action today to save money on your monthly expenses.

**********************************


Related QA

Pic
asked:
I follow your advice on penny shares and CFD's. I also understand from your writings that If I go short on CFD's it is possible what I might pay [read more]
Published at 26 Oct. 2016 in: Dividends Cfd's 1 Answer
Pic
johnnypi10 asked:
Hello Francois, It seems that Alaris Holdings has done well up to their year end (June 2016). Do you know whether they might pay out a dividend? [read more]
Published at 12 Sep. 2016 in: Dividends 1 Answer
Pic
JudieS asked:
This maybe a stupid question but I just want to know how dividend's is calculated. If I look at Nedbank they say it is 5.3% which in money value is [read more]
Published at 12 Aug. 2016 in: Dividends Calculation 1 Answer
Pic
marie2479 asked:
Is there a way to find out when dividends are paid by companies? I bought Merafe's, and just wondering if they will pay dividends? I am new. [read more]
Published at 19 Feb. 2016 in: Dividends 1 Answer
Pic
johnnypi10 asked:
Hello Francois, Will we have to wait 3½ years before AVL will start making decent profit and pay dividends? Can we expect sufficient price growth [read more]
Published at 15 Feb. 2016 in: Dividends 1 Answer

Related articles:


Latest:

Comments
0 comments



 
 


Youtube Twitter Facebook

Connect with us:    

POPULAR TOPICS
  • Accelerated Investor
  • Accessories
  • Accountancy
  • Accountancy services
  • Accounting
  • Accounting principles