Long term effective yield with reinvested dividends
It might be misleading to hold a stock for a long time and then check the stock profile to see the current dividend yield to get an idea of what a current holding is paying out. The power of compounded interest has been hashed and re-hashed over the years but it's worth looking at compounded interest on dividend reinvestment in terms of the growth of effective dividend yield.
Let's take for example one of the stocks in my dividend portfolio. Universal Health Realty Income Trust (UHT). I've held this stock since 2015 in my retirement account when I purchased 700 shares for about $49 per share. At the time, they paid a fairly juicy 5+% dividend yield but as the stock price has risen over the last 4 years the dividend yield has fallen to about 2.69% (still nothing to sneeze at with the rates banks are paying these days).
Just for clarity, dividend reinvestment (DRIP) is when you own shares in a company that pays a dividend and when the dividends are paid out, the money is used to purchase more shares of the same company automatically. With every dividend payment distributed by the company, the more shares you get from the company over the long haul. This means, every time you get a dividend, you are given increasingly larger payouts due to holding incrementally more shares than the last time. This compounded interest means your payouts will snowball if you hold the stock for a long enough period of time. (As a fun excerise, try figuring out what you'll have if you pay yourself a penny and then double that payout everyday).
So for my stock, the first year's dividend calculated out to 5.6% yield based on what I received in dividend payments and what I paid to initiate my position in the stock. Over the next 4 years, the payouts continued (and increased slightly every year). Since the stock price was rising during those 4 years, the yield fell but my initial cost was set when I purchased the stock and my initial 700 shares continue to earn the 5+ percent. However the dividends I received were used to purchase more shares and those shares are now also earning enough dividends to purchase additional shares on their own. It's not a fast buck, but with patience, my portfolio has grown by 150 shares.
My annual dividends this year (2019) are about 7.2% yield on my initial investment which is unheard of in the world of quality/investment grade (non-junk) income investing.
I've been berated for using yield on cost (YOC) as a measure of performance since, over time, the yield always rises (due to various factors that affect the current price, such as inflation) and becomes less and less effective as a useful comparison of the best current performance.
I suspect in an imaginary case of 0 inflation and no stock price growth over several years, the yield on cost would still be able to measure the compounded growth of the income stream but that would only be a useful comparison if all stocks experienced 0 price growth. There is an opportunity cost of missing a fast growing stock that can outperform the compounded growth of a slow growing income stream, so vigilance is still important.
Let's take for example one of the stocks in my dividend portfolio. Universal Health Realty Income Trust (UHT). I've held this stock since 2015 in my retirement account when I purchased 700 shares for about $49 per share. At the time, they paid a fairly juicy 5+% dividend yield but as the stock price has risen over the last 4 years the dividend yield has fallen to about 2.69% (still nothing to sneeze at with the rates banks are paying these days).
Just for clarity, dividend reinvestment (DRIP) is when you own shares in a company that pays a dividend and when the dividends are paid out, the money is used to purchase more shares of the same company automatically. With every dividend payment distributed by the company, the more shares you get from the company over the long haul. This means, every time you get a dividend, you are given increasingly larger payouts due to holding incrementally more shares than the last time. This compounded interest means your payouts will snowball if you hold the stock for a long enough period of time. (As a fun excerise, try figuring out what you'll have if you pay yourself a penny and then double that payout everyday).
So for my stock, the first year's dividend calculated out to 5.6% yield based on what I received in dividend payments and what I paid to initiate my position in the stock. Over the next 4 years, the payouts continued (and increased slightly every year). Since the stock price was rising during those 4 years, the yield fell but my initial cost was set when I purchased the stock and my initial 700 shares continue to earn the 5+ percent. However the dividends I received were used to purchase more shares and those shares are now also earning enough dividends to purchase additional shares on their own. It's not a fast buck, but with patience, my portfolio has grown by 150 shares.
My annual dividends this year (2019) are about 7.2% yield on my initial investment which is unheard of in the world of quality/investment grade (non-junk) income investing.
I've been berated for using yield on cost (YOC) as a measure of performance since, over time, the yield always rises (due to various factors that affect the current price, such as inflation) and becomes less and less effective as a useful comparison of the best current performance.
I suspect in an imaginary case of 0 inflation and no stock price growth over several years, the yield on cost would still be able to measure the compounded growth of the income stream but that would only be a useful comparison if all stocks experienced 0 price growth. There is an opportunity cost of missing a fast growing stock that can outperform the compounded growth of a slow growing income stream, so vigilance is still important.
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