Yield on Cost Math

It’s a news flash, I know, but I’m a fan of compounding dividend payments.  More so if those payments deliver annual increases, even if small.  In previous posts, Why Yield on Cost Matters and Why Yield on Cost Matters: II, I began the discussion of the concept, then expanded it with examples of why I think it’s important for Dividend Farmers to pay attention.

Below is a table demonstrating the math behind the yield on cost principle of dividend paying stocks.

Year	Buy Price	Initial Div	Initial Yield	Div. Increase	Div	Yield on Cost
1	$40.00	$2.00	5%	%	$2.00	5.0%
2				3.0%	$2.06	5.2%
3				3.0%	$2.12	5.3%
4				5.0%	$2.23	5.6%
5				2.0%	$2.27	5.7%
6				3.0%	$2.34	5.9%
7				3.0%	$2.41	6.0%
8				1.7%	$2.45	6.1%
9				2.0%	$2.50	6.3%
10				2.4%	$2.56	6.4%

The data represent a progression from which you might benefit with a solid, dividend paying firm.

In this example, a $40.00 stock is purchased and pays an initial dividend of $2.00 annually resulting in a nice 5% initial yield or yield on cost.  In year two, the firm declares a dividend increase of 3%.  It doesn’t sound like much on a $2 dividend.  In monetary terms it represents $0.12, which may not impress the trading crowd.

Every year you hold the stock, the company rewards you with a small dividend increase that varies from year-to-year.  Sometimes it’s a little larger, others smaller.

At the end of 10 years, assuming the raises shown, the dividend on your original $40 stock will have grown, through compounding, to $2.56 resulting in a 6.4% yield on the original cost.  Again, this won’t make certain investors salivate, but the change in dividend and yield from purchase through the end of year 10 represents a 28.0% increase relative to the initial dividend and yield. 

A similar progression of small dividend increases across a 20 year holding period means your dividend payment and yield could readily increase by 70%.  It’s true you have to be disciplined and patient to hold for this length of time.  And there’s always a chance regular dividend increases may not materialize.  However, companies with lengthy histories of dividend payments and increases tend to have great inertia behind the dividend and work diligently to maintain it, improving your odds of being a successful 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.