Why Yield on Cost Matters: II

Last month I wrote about why the Yield on Cost of dividend stocks matters.  The concept is sufficiently useful it bears adding detail including examples.

There are dividend paying stocks held within my portfolio for well over a decade – in some cases, more than two decades.  In other cases, stocks were purchased at fortuitous times like during the aftermath of the 2008 recession.  Most of these firms have been paying dividends regularly with some increasing payments on a consistent basis.  The combination of timely purchases, steady DRIP activity, periodic dividend increases, and a few stock splits along the way helped produce solid results.

For instance, I’ve owned National Retail Properties (NNN) for roughly a decade.  As of this writing, Yahoo.Finance shows a closing price of $48.02 with an annual dividend of $2.00 resulting in a yield of 4.16%.  I initially purchased the stock at a much lower price than today’s close.  In fact, the purchase was sufficiently in the rearview mirror that my cost basis is $22.17.  With a $2.00 dividend being paid on that basis, my yield on cost is 9%.

Altria (MO) is a stock I’ve owned continuously since the dawn of time – at least it feels like it.  Today’s closing price is $48.86 and the stock sports an annual dividend payment of $3.20 yielding 6.54%.  Like NNN, the cost basis reported by my brokerage is $22.42 providing a yield on cost of 14.2%.

Another holding is Pfizer (PFE) which closed today at $42.31 with a dividend of $1.44 annually providing a 3.36% yield on today’s price.  Given the length of time I’ve owned it my cost basis reports out at $15.67 for a yield on cost of 9.2%.

While some dividends have been reinvested at stock prices higher than the original purchase, thereby raising the average cost basis of an entire position, the fact remains that many of the shares acquired at a point close to the reported average basis provide a healthy yield given the periodic dividend increases occurring during my holding period.

What does this mean?  It means that if you buy solid dividend paying companies at good prices and hold them long enough, the dividend increases eventually drive up your yield on the original investment.  As in the cases above, it’s possible to see yields reach double digits. 

If you have such investments and are thinking about moving out of them, the challenge becomes one of finding alternatives providing better returns than the impressive yields available with your dividend stocks.  This strategy of course requires time and patience but once you’ve reached the point where you're enjoying the results, you may find it worth it.  You may also discover you’re a real Dividend Farmer.

The thoughts and opinions expressed here are those of the author, who is not a financial professional.  Opinions expressed here should not be considered investment advice.  They are presented for discussion and entertainment purposes only.  For specific investment advice or assistance, please contact a registered investment advisor, licensed broker, or other financial professional.