Measuring Progress – Yield on Cost or Dividend Yield

Individuals need to set a goal in order to succeed at anything, including our individual investments. Logically, the next step is to determine how we are going to measure our progress. In the realm of investments, most the individual investors (if not all investors) look at annualized returns and compare it with benchmark index. Here in India investors either use BSE’s Sensex Index or NSE’s Nifty Index. In addition, based on multiple discussions I have with individual investors, many investors use percentage based capital appreciation or depreciation which is devoid of time concept i.e. no time scale is involved.

For example, investors love to say “I made 150%, 200%, or 2x or 3x, or 0.5x times my money”. I cannot comments whether this progress measurement is right or wrong because I do not know individual’s objective and/or risk profile.

Ironically, of the many folks I have talked to in last ten years, more than 95% of them have always increased their original capital. Well if that’s the case then who is loosing it? If nobody is loosing, then why the market is more than 50% down from its peak. I am digressing from the subject, so coming back to the topic of measuring our progress……


One of primary objective of my income portfolio is to generate income, i.e. passive cash flow. As always, the key is to minimize investments and maximize income. I have been focusing on dividend-based investments. In my income portfolio I have multiple set of matrices to measure my progress. One of the metrics I track is “Yield of Cost” or YOC. It is a very simple metrics but very powerful. YOC is calculated as:


YOC = [(annual dividends per share) x (no. of shares)] / [Cost Basis]

Cost Basis takes into account the purchase price and all taxes (i.e transaction, service, commission, etc).


I have had on an off discussion with folks, (professional and amateurs alike), and they find it really hard to understand the concept of YOC. The argument is YOC is an irrelevant metric. What is its significance and purpose when one can multiply the capital twice or thrice in few months time period. Even if the investment is income focused, current yield is what matter the most and not YOC. YOC is based on timing of the investment, always remains fuild, and cannot be used for relative comparison. Perhaps those are correct from one viewpoint, but let us see some examples of my investments…..


I invest in securities that provide dividend income. In addition, I focus on corporations those have steadily growing earnings (if not leaps and bounds). My expectation is as Indian economy continues to grow; these corporations will slowly and steadily continue to increase their dividends. Even if they do not grow the dividends, perhaps they will maintain some consistency. More on this in future post. For my objective, YOC is optimal measure of progress in reaching my goal. I am discussing about three of my investments viz. ONGC, LNT, and NTPC.


1. I purchased ONGC in year 1999. My cost basis is Rupees 102.9. As shown in table, at the time of purchase my YOC was 5.3%, much lower than a risk free savings account of approximately 7%+. I have not made any investment in ONGC since then. I continue to hold my 1999 position. We can see how my YOC as consistently increased and now in 2008 YOC stands at 31%. Now which investment will give me 31% annualized return on my investment?


2. I purchased LNT in February 2001. My cost basis is Rupees 261.4. As shown in table, at the time of purchase my YOC was 2.5%, again, much lower than risk free savings account. My YOC for this batch of investment in LNT is 5.7% in year 2008. As time progresses, I expect this YOC to grow further.


3. I purchased NTPC in March 2005. My cost basis is Rupees 93.5. As shown in table, at the time of purchase my YOC was only 1.3%, again much much lower than risk free savings accounts. At the end of year 2008 (i.e. only after 4 years), the YOC on my investments has increased to 3.7%. Here also, I expect this to grow as time progress.

YOC Table

YOC Table

Note I have not yet taken into account the potential increase in the value of my investment. All of these original capital investments have now increased by significant amount.


Another way to look at it is: Total dividends alone paid by ONGC is 252% of my original capital, LNT has already paid me 45% of my original capital, and NTPC has already paid me 14% of my original capital. I will leave up to readers to figure out what would be the total return including dividends and today’s value these stocks.


If one were to judge these investments solely on current yield, then they would virtually on relative basis be similar to when I had bought them. However, based on my original investments, the YOC (and hence my income) is growing continuously every year. The primary reason for this growth is corporation’s increased earnings and hence increased dividends.


Now you know why I use YOC to track the progress of income portfolio. I expect my YOC to grow over time. At the time of this writing, I have 12 equity investments in my income portfolio. While the YOC for individual equities is quite different, my YOC for whole income portfolio is at 4.9%.


In my future post, I will discuss why I choose dividend-based equity income over a safer risk free savings account.

So what do you think about Yield-on-Cost?









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19 Responses to “Measuring Progress – Yield on Cost or Dividend Yield”

  1. Money Penny says:

    wow, ongc yield is 30%. are calculation correct?

  2. BuffetFan says:

    TIP guy
    Your funda is correct & clear.

    i agree with that. but we can not reap huge money unless we take huge positions.

    In my view investment in ONGC at 102 would make sense if you had 1000 or more shares in 1999. If that is so then i must congratulate you for your success. otherwise buying only 10-50-100 shares doesn’t make any sense to keep holding for such a long time for that income.

    • TIP Guy says:

      BuffetFan,

      Once again, thanks for the comment.

      I have a difference of opinion with your thought process. It’s not about huge money or huge positions. It’s about what you give in, and what you get out. Input vs. Output. Its about total returns, its about yield – on- original cost. I did not even discuss the price appreciation or dividend reinvestment yet .

      Sure, it is not an income one can survive on. That’s why “The Income Portfolio” and not “income stock”.

      Survivable income cannot be achieve from one stock. You need a portfolio, build it over time, and nurture it to generate increasing cash flow.

      You seem to be BuffettFan. Last time I checked Buffett builds his portfolio, he buys stock at different intervals. Last time I checked Buffett believed in holding it forever! May be he has changed this though process lately because of this downturn!

      Buffet’s portfolio generates cash flow of more than 1.2 billion dollars. All those shares he has build over time and does not come from one stock. he does not build his portfolio by one time huge buy. His portfolio has more than 15% YOC.

  3. BuffetFan says:

    for that matter..
    I have Axis bank (formerly UTI) since IPO in 1998..i hold 100@21.. but today i should not be blowing my own trumpets for what i am holding and i got as dividend yield.. because i may not call whatever dividends i got since then as INCOME. Had i invested in that around at least 5000 shares.. then only it could have been an INCOME for me…

    • TIP Guy says:

      It’s the same argument as your above comment. If you are assuming buy one stock just one time is enough for an income, then your expectations or understanding are not correct.

  4. BuffetFan says:

    Diversification offers no protection from downside risk and virtually guarantees poor results. Good example is Sensex or Nifty.. they are well diversified still down 50% why? where is the protection? My point is to collect INCOME one must focus on few bets with full money.

    At one time buffet used to put 40% of his net worth into single stock. Plus he was OKAY with borrowing money upto 25% of his networth if he finds a situation where he can get more than his interest costs.. That way only we can generate income in longer duration…

    Please read buffet partnership letters 1959-69 for his initial days methodology

    • TIP Guy says:

      You have a good argument here about diversification. But your use of examples and arguments are not correct. Who said SENSEX/NIFTY is down 50%? if i look relative to 1998 they are way up. If you look for just last two years, yeah they are down 50%. But then are you a trader or investor? Last time I checked, Buffett was an investor!

      BuffettFan would not invest the way you are talking about. BuffettFan does not care about market. BuffettFan should be looking into valuations and what it is worth to pay for a stock? If a BuffettFan is looking to buy at higher valuations, yeah 50% cut should be expected!

      I still do not think you understand INCOME properly. Few bets will full money — does not happen at one go. It is built over time. Buffett has 80% in 10 stocks which he has built over 15+ years. Buffett hasn’t bought all his stake at one go!

      I am little confused with your examples and your intrepretation of Buffett’s investing approach. On one side your name is BuffettFan and you are continuously using his example, while on the other hand all your arguments are against Buffettology!

      Just an FYI– As per modern portfolio theory, Buffett’s portfolio is one of the best diversified portfolio one can have. Stocks in his portfolio have one the smallest correlation one can find among any of the big time investors.

      It’s a myth that one needs 100’s of stocks for a well diversified portfolio. You can achieve diversification by even 10 stocks.

      Sorry, I do not understand Buffettology properly. Yes, I will surely go back to read his letters.

      Thanks for your comments. I enjoy reading them.

      Best Wishes,

      • BuffetFan says:

        Buffet did accumulate his 80% positions recenylu.. when he has adequate funds. what was the situation when he was running the partnerships? He bought Sanborn Map upto 35% of his portfolio, Commonwealth Trust 20% of portfolio..within months he offloaded Commonwealth at $80.. which was purchased at $51.

        He relied on borrowing (up to 25% of his net worth). read his Partnership letters carefully (not Berkshire Hathaway).. and once he had sufficient funds, he moved on with long bets on which he is still sitting.

        What is going to matter if i am holding 100 L&T or 100 Thermax for 10 years..? how it will generate second income for me? Will that support my lifestyle if i lose my primary source of income?

        How are we doing with 10ks & 20ks? where are we going with this play? It makes no sense for me if Investing does not become another pillar of my income as primary after so many years of experience.

        Buffetology is no rocket science. it’s full of Emotions, greed, timing the market & ruthlessness. My perspective has changed a lot about Buffet & his methodology after reading his Partnership letters. I admire him more now.. 🙂

        The only thing i wanted to convey.. we should not be wasting our time doing foolish things around like experimenting so called investment strategies & methods. Read Dhandho Investor for that matter..you will come to know what i mean by Few bets full bets.. Mohnish does the same buffet did in his early life..

        Once we have full of capital..we will afford to select a few and sit long on them.

  5. BuffetFan says:

    [Buffet on Diversification]
    I have 2 views on diversification. If you are a professional and have confidence, then I would advocate lots of concentration. For everyone else,
    if it’s not your game, participate in total diversification. The economy will do fine over time. Make sure you don’t buy at the wrong price or the wrong time. That’s what most people should do, buy a cheap index fund and slowly dollar cost average into it. If you try to be just a little bit smart, spending an hour a week investing, you’re liable to be really dumb.

    If it’s your game, diversification doesn’t make sense. It’s crazy to put money into your 20th choice rather than your 1st choice. “Lebron James” analogy. If you have Lebron James on your team, don’t take him out of the game just to make room for someone else. If you have a harem of 40 women, you never really get to know any of them well.

    Charlie and I operated mostly with 5 positions. If I were running 50, 100, 200 million, I would have 80% in 5 positions, with 25% for the largest. In 1964 I found a position I was willing to go heavier into, up to 40%. I told investors they could pull their money out. None did. The position was American Express after the Salad Oil Scandal. In 1951 I put the bulk of my net worth into GEICO. Later in 1998, LTCM was in trouble. With the spread between the on-the-run versus off-the-run 30 year Treasury bonds, I would have been willing to put 75% of my portfolio into it. There were various times I would have gone up to 75%, even in the past few years. If it’s your game and you really know your business, you can load up.
    ===

    Got that last line?

  6. 69Stingray says:

    I understand your YOC formula and approach. I actually use to use it when figuring out my effective yield each quarter. I switched back to “traditional yield” which is the yearly dividend divided by my original cost basis (while, actual cost basis not including taxes on distributions – so additional out-of-pocket purchases are counted). This helps my compare if my yield % is high enough to justify the risk associated with the stock market.

    I think YOC is a good way to compare holdings in a portfolio. The holdings that are increasing the YOC percentage the fastest is a keeper.

    • TIP Guy says:

      Stingray,

      Good to know you also use YOC. Yes, the faster increasing YOC is surely a keeper.

      What do you mean by “yield % is high enough to justify risk associate with stock market”? Can you elaborate?

      Best Wishes,

      • 69Stingray says:

        TIP Guy, I way I look at my small portfolio, I can invest my money in a money market, CD or low-beta, income focused mutual fund. Since there is a higher risk of capital lost (for whatever reason), I like to compare apples-to-apples yield. Yield on my dividend paying stock vs. yield in a CD. What percentage does a CD pay based on my original amount vs. what percentage does the stock pay on the original amount.

        By the way, excellent website!

        • TIP Guy says:

          Stingray,

          I understand your viewpoint and it makes sense. When I look at current dividend yield (and projected dividend growth), I also compare it with FDs. FD in India = CD in US.

          Thank you for your good words.

          Best Wishes,

  7. Sachin8778 says:

    Hi TIP Guy, I recently found your blog from Rohit’s website and finding it very interesting. I understood the YOC measure you explained here and believe is good way to measure the returns.

    I am going through your other posts. On one thing I would like to understand your views in more details. I got the impression that you do not sell the positions to book profit and you would probably do it after 15 years of holding it. I think here I am missing something.

    Why not sell when the market is overvalued? Well I understand you do not focus on the intrinsic value of holding companies to make a ‘buy’ decision. Also it is not easy to determine when market is overvalued but why not make an effort to see if Mr. Market is offering crazy price to buy out your share?

    How about a little different strategy to make ‘sell’ decision? Here comparision of current yield to risk free yield can through some intersting facts.

    You can rely on your historical analysis of PE, current yield, etc to know when market might be in the overvalued terrotory. It can serve as a trigger to further analyse the individual stock to make the decision. Also you can choose the higher margin (margin of risk 🙂 i.e. measure of overvalue) for making a ‘sell’ decision so to keep it less frequent matter.

    Would love to have your thoughts.

    Thanks,
    Sachin

    • TIP Guy says:

      Hello Sachin,

      You have a very good question, and I appreciate you asking it. I have been wondering, why such question has not been asked yet.

      Responding in comments section will not do a proper justice to this question. I will write a post in next couple of days. Thanks for your patience.

      Best Wishes,

  8. Proliant says:

    Hello Tip Guy,

    I got 33 shares of a stock at 106 RS cost basis, which declared 1 RS yearly and 0.75 RS interim dividend, so for this year it will be 1.75 Rs dividend per share.

    YOC= (1.75 x 33)/106 x 100= 54.48%

    Dividend yield = 1.75/106 x100 =1.65%

    is my calculations correct?

    Best Wishes

    • Young@Market says:

      106 is your total cost for all the shares? or for 1 share it is 106 Rs?
      If is is for 1 share 106.. I don’t think that u took the full cost to find the YOC
      YOC = (1.75*33)/(106*33) * 100 , which will be same as ur div yield value. As far as I know Div Yield term is used wrto current price of the stock / may be at a yearly avg price!!! so if the stock is priced at 200 Rs and you get 2 rs as div.. you get 1% div yield. Anyone, plz correct me if I am wrong.

      • TIP Guy says:

        Hello Young,

        Thanks!. Dividend Yield is based on current market price. And hence it changes daily. And you don’t know, if current year dividend would be same? So you may buy with 10% dividend yield (because dividend was paid last year). But at the end of this year, dividend could be less or zero.

        YOC is what you get. Once you buy, you cost basis remains fixed. YOC is relevant only if you plan to hold longer than 4 or 5 years. Not relevant for less than that.

        Best Wishes,

        Best Wishes.

    • TIP Guy says:

      Hello Proliant,

      Your approach is incorrect. How can you take “total dividends from 33 shares” and use cost basis for “only one share”. It has be to same.

      Your first year YOC is 1.75 / 106 = 1.65%

      Let us assume your second year dividend is Rs. 1.95. So your second year YOC is 1.95 / 106 = 1.83% The cost basis per share remains same.

      Hope this helps.

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