hi i'm jimmy in this video we're looking at dividend yield on cost
what it means and if it's a good thing or not for us to consider
and if it is good how can we use it and then hopefully we can take this
information and make slightly better investment
decisions and ideally get us closer to our goal of achieving
financial freedom okay so let's jump right in
so what is dividend yield on cost oftentimes we'll hear this call just
yield on cost it's the same thing okay so first
let's look at how we calculate dividend yield then yield on cost is fairly
simple now this works with etfs or stocks the
process for both is the same so first we take 12 months
of dividends per share this could be the
past 12 months in that case they'll call that the
trailing 12-month dividends per share that's the most common way to do it or
we could even take the next 12 months the expected dividends over the next
12 months they call this four dividends per share
but the past 12 months is most popular so let's go with that one
for our examples okay so now we take our dividends per share
and we divide that by the current stock price and this gives us a current
dividend yield so let's look at a quick example like
coca-cola so we could see how this works in action
so over the past four quarters coke has paid
for dividend four different dividends they total up to
a dollar 62 per share so we take that dollar 62 and we divide that
by the current price which is about 45 per share right now
and that gives us a dividend yield of about 3.6 percent
but now let's ask a question what if coke's stock
what if their stock price rises up to 60 dollars per share well assuming the
dividend stayed the same our price would go up from 45 we'd switch that over to
60 and our dividend yield just like that
drops to 2.7 percent because it's the same $1.62 in
dividends by a new higher price of sixty dollars per share but does that
new price really matter to us we paid forty five dollars per share so
our dividend yield on cost is still three point six percent and for
those of us who like to think of this in terms of math
well now the yield on cost formula is the same dividend past 12 months
in dividends we divide that by our position
cost not the current stock price so if we paid 45
per share no matter what the current price is we stick our average cost
for that particular investment into the formula and this doesn't change
unless we buy or sell shares one good example of this
is warren buffett's purchase of coke this
is a screenshot of from warren buffett's most recent annual shareholder letter
and if we look at the coca-cola line item well we can see that he spent about
1.3 billion dollars to buy 400 million shares
that puts his cost basis at 3.25 cents and given that we know that coke has
paid about a dollar 62 over the past year well that gives
warren buffett a yield on cost of about 50 percent
okay now our question is is yield on cost a good
thing for us to consider well like most things in investing
and probably in life as well there's pros and cons
to using any one metric yield on cost is just the same
one negative viewpoint of yield on cost and they say that it's a silly way to
look at a dividend yield because basically
sure it costs warren buffett 3.25 cents per share to buy that stock but it's
worth 45 dollars per share right now so right now warren buffett has 45
dollars per share tied up to earn a dollar 62 in dividends
and the argument goes that if buffett sold his shares today
and bought something with a current dividend yield that was higher
than coke's current dividend yield of 3.6 percent
well he could earn a bigger bang for his buck when it comes to dividends at least
this is a very logical argument but it could be missing a few other
important considerations so if buffett sold his
coke stock well he's going to have one heck of a tax bill
for the long-term capitals gains that he has accumulated
but also the assumption with the debate that uh yield on cost isn't any good
is that buffett can easily find a better place to put his capital to work
sure he can get a higher dividend yield but i'm fairly certain that's not his
only consideration so while i do think it makes sense for
us to always question are we better off holding this company
buying more or selling it i'm not sure it makes
sense to completely ignore the fact that
selling uh any particular investment any
believes any profitable investment would likely bring on taxes and it would
bring on the need to replace that investment
in our investment our debt holding in our investment portfolio
now on the flip side and the debate of on the advantages of using
dividend yield on cost and i've actually had some personal experience
with this type of thing and that is i was helping some family members set up a
dividend portfolio for themselves they retired and they told me that they
needed to earn at least five percent in dividends
each year okay so we have to put together a portfolio
and if i remember correctly their portfolio was set up to earn about
at the end of the day was about 5.5 we built in a little bit of buffer room
to make sure that they consistently hit their 5 dividend yield
and i should point out that in that particular portfolio i used only
etfs to make sure that they stayed plenty diversified
well shortly after that the we put together the portfolio that we invest in
it shortly after that the stock market
starts doing what it did and the etf prices start moving all over the place
some up some down some even had wild spikes or wild drops
but i kept trying to convince them to stop watching the daily price changes of
each individual stock we know what we paid and i had picked uh
etfs that i thought the dividends would be
safe in the long run so any shifts in today's price was
somewhat irrelevant to our personal dividend yield put
another way no matter what the etf did for uh the price of the etf
did from day to day our dividend yield on cost would stay
the same as long as that dividend stayed the same
and if it got better good for us our dividend yield on cost
would go up and hopefully the dividends that were
being paid don't go down if they did in that case well then our
dividend yield on costs would go lower so in my mind this was a very
appropriate way of using yield on cost once we locked in our cost basis well
the only thing we need to watch from that point is the consistency of
their dividends and yes even if our etfs or our stocks
go up in value well it could make sense at some point
to sell those those investments and replace it with something better
if we think we have something better but for me that's not a yield on cost
decision that's a quality in overall quality of
investment decision so in that scenario i wouldn't be
clinging on to our position if we're buffeting
we have coke like this i wouldn't be clinging on to the coke position
because we have a high yield on cost i think that is a silly reason
to stay in a position but i don't think it can be completely ignored i just
think it's one of the many factors to consider
do we have a better investment if we do then perhaps selling it makes the most
sense now if we're curious about the dividend
portfolio that i put together for my family
uh it was a few years ago when i put that portfolio together for them
if you're curious please let me know in the comments below i can do a video on
that if you're interested and if you're wondering what was in that portfolio
well yes i did put in there the high dividend etf that i
was help uh creating called the granite shares high income etf the
ticker symbol there is hips and i actually did a video
on how a dividend etf is created if you're curious perhaps that could be
a good next video for you to watch i got a link right here i got a link in the
description below and thank you so much for sticking with
me all the way to the end of the video i really appreciate it thanks and i'll
see in the next video