What is the dividend yield on your portfolio

[Dash man]

Don't bother on my account.



This was discussed here a while back. Yield on cost is a meaningless metric. The only way where I could see that it had any relevance was if someone had an asset that couldn't be sold. Then, I suppose you could compare with other people with assets that can't be sold. I can't picture this scenario.



The point to that is, as long as you can sell it, you can move to something better ('better' being higher dividend in this case). The only thing that will tell you if something is better or not, is to compare yield on current value. Yield on cost tells you nothing of value.



Hypo Example:



I buy a stock that pays a steady $1 in divs, and I paid $10 for the stock years ago, 10% YOC.



You buy that same stock today at $20. You have a YOC of 5%. But it's the same stock with the same outlook. A metric that gives a 2x difference for the exact same thing is meaningless.



Same thing if those were 2 different stocks that you owned. YOC would tell you nothing.



-ERD50

Your example has a flat dividend, so that is meaningless. I look at the history of yearly dividend increases. There are plenty of stocks that increase their dividend 5-10% or more on top of price growth. I wouldn’t touch a stock with a flat dividend.

 

[ERD50]

Your example has a flat dividend, so that is meaningless. I look at the history of yearly dividend increases. There are plenty of stocks that increase their dividend 5-10% or more on top of price growth. I wouldn’t touch a stock with a flat dividend.

That has nothing to do with Yield on Cost as a metric.

One approach to not being able to defend a statement, is to change the subject. I think this is a demonstration of that. So I'll repeat, Yield on Cost is a meaningless metric.

-ERD50

 

[Dash man]

That has nothing to do with Yield on Cost as a metric.



One approach to not being able to defend a statement, is to change the subject. I think this is a demonstration of that. So I'll repeat, Yield on Cost is a meaningless metric.



-ERD50

A stock that regularly increases a dividend that raises yield on cost is meaningless? That’s like saying the price increase of a stock is meaningless. The subject hasn’t changed, you just can’t see the value.

 

[ERD50]

A stock that regularly increases a dividend that raises yield on cost is meaningless? That’s like saying the price increase of a stock is meaningless. The subject hasn’t changed, you just can’t see the value.

Yield on cost as a snapshot is meaningless.

I guess you are saying you use it as a way to measure the dividend growth of a company? OK, but that sounds really convoluted. Just measure dividend growth then. When you, or someone else bought it doesn't change that.

Or, you could just measure Total Return, which tells you everything

-ERD50

 

[NW-Bound]

People have different ways of measuring something.

The way I look at each of my assets is asking what it has done for me lately. Lately does not mean last month, or last quarter. I give my stocks longer than that.

If a stock stumbles for 1 year, I have to ask why, and find reasons to keep it. I don't care what it did 10 years ago, or 5 years ago.

Again, YMMV. I do not care what metric someone else uses to value his stocks. I know what I do with mine. And I compare the stock to the market, and to its industry.

Peace.

 

[audreyh1]

I only pay attention to total return.

 

[Gumby]

I only pay attention to total return.

Same here.

 

[Dash man]

I only pay attention to total return.

Isn’t dividend growth part of total return?

 

[NW-Bound]

Speaking about dividend yield, I just looked up something.

That is, I took what Quicken said my total stock dividends were over the trailing 12 months, then divided that by the current total stock value. It's 2.38%.

When I did the same with the S&P, it's 1.54%.

I do not pick stocks for their dividend yield, because I am a total return investor. Then, why do my stocks as an aggregate have a higher dividend yield?

I think it's because I do look at P/E or rather PEG when I pick a stock. And because I shun growth stocks with high P/E, these commonly pay no dividend, and I do not own them. In other words, I pick a subset of the S&P.

And you would think that I would miss out on the high-growth stocks, and got stuck with the old boring stocks with little or no growth. Yet, my total portfolio keeps up with the S&P just fine, and even surpasses it while not being 100% invested.

You can say that I am suspicious of these high P/E stocks. As the result, I have better total return than the S&P. And better dividend yield also.

PS. By the way, I own BRK too, and it never pays dividends.

 

[Gumby]

Isn’t dividend growth part of total return?

Audrey can answer for herself, but I care about only two numbers. How much I had last December 31st and how much I will have this Dec. 31st. I like the latter to be larger, and how that occurs is irrelevant to me. Dividend yield appears to be important to some, and I'm glad they have developed a methodology to calculate it. But I just don't care.

 

[Dash man]

Speaking about dividend yield, I just looked up something.

That is, I took what Quicken said my total stock dividends were over the trailing 12 months, then divided that by the current stock values. It's 2.38%.

When I did the same with the S&P, it's 1.54%.

I do not pick stocks for their dividend yield, because I am a total return investor. Then, why do my stocks as an aggregate have a higher dividend yield?

I think it's because I do look at P/E or rather PEG when I pick a stock. And because I shun growth stocks with high P/E, these commonly pay no dividend, and I do not own them.

In other words, I pick a subset of the S&P. And you would think that I would miss out on the high-growth stocks, and got stuck with the old boring stocks with little or no growth. Yet, my total portfolio keeps up with the S&P just fine, and even surpasses it while not being 100% invested.

You can say that I am suspicious of these high P/E stocks. As the result, I have better total return than the S&P. And better dividend yield also.

PS. By the way, I own BRK too, and it never pays dividends.

BRK doesn’t pay dividends, but it earns many and reinvests them. They get enough dividends from KO each that two years matches its original investment.

 

[NW-Bound]

BRK doesn’t pay dividends, but it earns many and reinvests them...

But of course.

And that's why P/E is important, while dividend yield is not.


PS. I should say PEG, because dying stocks often have very low P/E. And high dividend yields too.

 

[audreyh1]

Isn’t dividend growth part of total return?

Sure it must be, but I don’t care about how much it contributes.

Audrey can answer for herself, but I care about only two numbers. How much I had last December 31st and how much I will have this Dec. 31st. I like the latter to be larger, and how that occurs is irrelevant to me. Dividend yield appears to be important to some, and I'm glad they have developed a methodology to calculate it. But I just don't care.

Pretty much ditto.

I look at my portfolio value on Dec 31 and use that to calculate my withdrawal for early Jan. Withdraw those funds and rebalance the remaining portfolio back to my target AA.

Some years my withdrawal is up, some years it’s down, over many years it has grown quite a bit.

 

[Samsung4321]

I just don't care.

Because USAn profits are double taxed (company tax, dividend income tax) and consequently USAn companies financially engineer their balance sheets to avoid / defer taxable profit. Company tax is profit lost by USAn shareholders.

Australian companies pass on company (franking) tax credits with their dividends paid to shareholders. Company tax is credited to shareholders in proportion to dividend received in whose hand they are franking credits. Consequentially company tax is not lost by shareholders and dividend payers are keenly sought.

 

[NW-Bound]

Due to this thread, I looked at the dividend yield of my stocks, then that of the S&P.

And I noticed that my stock dividend yield, while higher than that of the S&P, is lower than the composite yield of my cash, which comprises of I bonds, stable value, money market, and a short-term T fund.

The above relation has not been true for quite a few years. It's because cash pays nothing until now. It has been going on for so long, and we take it for granted. But it is not natural.

Additionally, the stock dividend yield is also awfully low, with that of the S&P at 1.5%. And prior to this bear market, the S&P yield was even lower, at 1.4% or so.

Books on investments that I read long ago said that

... bonds are considered lower risk income investments, which unfortunately also means that they tend to offer relatively lower yields and returns than many dividend stocks. On the plus side, bonds tend to be much less volatile than stocks, though not always.

With the interest rate rising back to the historical average, should we not expect to see the stock dividend rising back? Along with this, will we see the P/E reversion that pundits warned us about? The late Bogle said he could not know when it would happen, only that we should not be surprised when it does.


From Investopedia:

During the 90 years between 1871 and 1960, the S&P 500 annual dividend yield never fell below 3%. In fact, annual dividends reached above 5% during 45 separate years over the period. The sharp change in S&P 500 dividend yield traces back to the early to mid-1990s. For example, the average dividend yield between 1970 and 1990 was 4.03%. It declined to 1.90% between 1991 and 2007. After a brief climb to 3.11% during the peak of the Great Recession of 2008, the annual S&P 500 dividend yield averaged just 1.97% between 2009 and 2019. From 2020 onward, the dividend yield fell below 2%, ranging between 1.4-1.5%.

Two major changes contributed to the collapse of dividend yields. The first was Alan Greenspan becoming chair of the Federal Reserve in 1987, a position he held until 2006. Greenspan responded to market downturns in 1987, 1991, and 2000 with sharp drops in interest rates, which drove down the equity risk premium on stocks and flooded asset markets with cheap money. Prices started climbing much faster than dividends. Despite evidence that these policies contributed to then-recent housing and financial bubbles, Greenspan’s successors effectively doubled down on his policies.

The second major change was the rise of internet-based companies in the United States, especially following Netscape’s initial public offering (IPO) in 1995. Technology stocks proved to be quintessential growth players and typically produced little or no dividends. Average dividends declined as the size of the tech sector grew.

 

[scrabbler1]

Most (~75%) of my taxable account's dividends come from a single bond fund and pay my bills. As a percent of my total taxable account's value, based on the last 12 months, I get 2.9% as a dividend yield. The rest of my dividends come from a stock index fund and some muni bond funds and get reinvested.

I have a rollover IRA which generates some dividends, but while I record those transactions I don't do any calculations like the ones I do in taxable.

 

[Samsung4321]

the stock dividend yield is also awfully low, with that of the S&P at 1.5%. And prior to this bear market, the S&P yield was even lower, at 1.4% or so.

ASX S&P200 passive ETF STW gross dividend yield Trailing Twelve Months: 8.32%

https://www.marketindex.com.au/asx/stw

USAn cash interest rates have been repressed for nearly 30 years, Aus for 10.

 

[Samsung4321]

With the interest rate rising back to the historical average, should we not expect to see the stock dividend rising back?

Due to double taxation of USAn dividends and wide knowledge of how to mitigate that, expect more share buybacks - not more dividends?

 

[NW-Bound]

Due to double taxation of USAn dividends and wide knowledge of how to mitigate that, expect more share buybacks - not more dividends?

It's not the rise of dividend in dollar amounts, but the dividend yield.

The rise of dividend yield is caused by the P/E reversion. These two go together.

The lower P/E knocks down the total return. Same E, but lower P.

If a retiree bases his spending on E, he's OK. If he counts on P, he will be disappointed.

 

[Samsung4321]

It's not the rise of dividend in dollar amounts, but the dividend yield.

The rise of dividend yield is caused by the P/E reversion. These two go together.

The lower P/E knocks down the total return. Same E, but lower P.

If a retiree bases his spending on E, he's OK. If he counts on P, he will be disappointed.

E = Earnings = Profit after tax.
This is manipulated in many ways (including debt) to defer tax or reduce earnings to avoid / minimise tax. Company tax being lost by USAn shareholders.

Earnings - Retained Profit = Dividends.

In a competitive yield environment:
Share Price ~= Dividend per share / Interest Rate of similar risk.

With repressed USA interest rates, Share Price is higher; P / E is higher.

Increased interest rate - what is a USAn company to do?
Increases interest payments on existing debt.
Reduces sales as savers save and consume less.
...
Many wrinkles depending on circumstances.

 

[NW-Bound]

Whether the company pays dividend, keeps the earning to grow, or uses it to buy back shares, what happens in a higher interest rate environment is this: for each $1 in earnings, investors will pay less for the company valuation. This is the P/E reversion.

The P/E of the S&P is currently 20.78. The historical median is 15. If the earning is going to stay flat for the next year or two and we also have P/E reversion, we are talking about a market drop to 15/20.78 or 72% of current value.

If the P/E does not re-expand, this means a permanent portfolio shrinkage to 72c on the dollar. And 4% WR of the new shrunken portfolio is 2.9% WR of the current portfolio.

I am drawing much less than 2.9% now, so the only effect for me is that I will feel poorer.

By the way, FIRECalc has never had a period of P/E contraction. So this is not in its "database".

 

[ESRwannabe]

I only own stocks and cash. No bonds.

My stocks yield on cost is 3.67%.

 

[ESRwannabe]

So it's interesting that the dividend yield % number can look 'better' (higher), even if it is lower in absolute terms, if the market value of the assets dropped further than the dividends.

Hypothetical Example - A $3 dividend on $100 worth of stock is 3% yield.

A year later, the dividend has dropped to $2, but the stock has dropped to $50, so the dividend yield is now 'better' at 4%. But certainly not 'better' for someone 'living off dividends'!

I'm not sure what anyone learns from a single number like this.

-ERD50

That's why I track my yield on cost and not my yield. YOC uses your principal as the denominator instead of the current market price.

 

[ESRwannabe]

For me, another source of income is the option premium I get from writing covered calls on the stocks I hold, and covered puts on the cash.

Again, it's easy to use Quicken to look at the sum of these option premiums over the trailing 12 months. I will just say that it's significantly more than the 2.69% above. Altogether, it helps me keep up with inflation (not quite, but it helps).

In dollar amount, I would say that my time spent writing options pays more than 2x per hour what I made when last working, and I was quite reasonably compensated as a contracted engineer.

I haven't sold any options in 2022. I was selling cash secured puts in 2020-2021 during the bull run. Not sure if I want to sell any puts until the Fed turns accommodative again.

For covered calls I'd rather just have an etf like DIVO or JEPI do it for me.

 

[ESRwannabe]

A stock that regularly increases a dividend that raises yield on cost is meaningless? That’s like saying the price increase of a stock is meaningless. The subject hasn’t changed, you just can’t see the value.

Arguing with ERD50 is pointless. Just IMHO.