Tuesday, January 10, 2017

Yield and Cost Coverage

In my review of Bank of Montreal (TSX-BMO, NYSE-BMO), I looked at what dividend yield or cost coverage you might have if this stock was purchases 5 to 30 years ago. In that post I talked about how well I did with the stock that I purchased for my Trading account.

My dividends since 1987 covered the cost of my stock in 1987 and in my subsequent purchases by 173%. However, according to the table below, stock bought some 30 years ago (in 1987) with a median price, the purchase price would be covered by 643%. However, investors do tend to buy a stock over a period of time rather than all at once.

Dividend growth stock can deliver great returns over the longer term. For this stock which I bought in 1983 some 34 years ago, I am making a dividend yield of 47.8% on my original purchase price of $7.37. The following table shows that if you had bought this stock from 5 to 30 years ago before 2017 what your yield or cost of purchase price would be covered if you paid a median price for this stock.

Yield Cost Covered
Yield if held 5 yrs. 6.11% Cost covered if held 5 years 28.00%
Yield if held 10 yrs. 5.25% Cost covered if held 10 years 45.09%
Yield if held 15 yrs. 9.85% Cost covered if held 15 years 112.01%
Yield if held 20 yrs. 13.91% Cost covered if held 20 years 178.50%
Yield if held 25 yes 32.80% Cost covered if held 25 years 451.74%
Yield if held 30 yes 44.28% Cost covered if held 30 years 642.92%

In the above table the yield after 10 years is lower than the one after 5 years because some 10 years ago (2007) the stock hit a peak that was not again matched until 2013. If you had purchased the stock at the lowest in that year your current yield would be 5.79%. Better, but if you had waited until the following year (2008), your yield would 6.95% and in 2009, 8.84%. Some years are just not good years to buy particular stocks.

However, if this stock was bought at the current price $97.81 with the dividend of $3.52 with the continuing dividend increase at 4.35% (the increase for 2016), then in 5 to 30 years times the dividend yield would be as shown in the table below.

In this table if you buy the stock at a $ 97.81 and held it for 5 years you would have a yield of 4.45%, an increase of 23.7%. If you hold the stock for 30 years, you would have a dividend yield of 12.91%, an increase of 258.7%. This is assuming at the growth in dividends is at 4.35% per year over these periods of time.

Div. Yield 4.45% earning in 5 Years at IRR of 4.35% Div. Inc. 23.73%
Div. Yield 5.51% earning in 10 Years at IRR of 4.35% Div. Inc. 53.08%
Div. Yield 6.82% earning in 15 Years at IRR of 4.35% Div. Inc. 89.40%
Div. Yield 8.43% earning in 20 Years at IRR of 4.35% Div. Inc. 134.34%
Div. Yield 10.43% earning in 25 Years at IRR of 4.35% Div. Inc. 189.94%
Div. Yield 12.91% earning in 30 Years at IRR of 4.35% Div. Inc. 258.73%

The combination of yield and dividend growth can really make a difference. In the above table with 4.35% dividend growth starting at 3.60%, in 30 years' time the yield on the original purchase price (that is $97.81) would be 12.91%. If you had bought this stock 30 years ago, the yield on your original purchase price (that is at $7.91 in 1987) your current yield on that $7.91 purchase price would be 44.28%.

My purchase price in 1983 (including commission) was $7.37 with a yield of $6.65%. I am now earning $3.52 on that $7.37 cost which is a yield of 47.76%. For my original purchase I started at a higher yield (6.65% compared to current one of 3.60%) and my dividend growth was higher (5.95% compared to current one of 4.35%).

On my other blog I wrote yesterday about Royal Bank of Canada (TSX-RY, NYSE-RY)...learn more. Tomorrow, I will write about Rogers Sugar Inc. (TSX-RSI, OTC- RSGUF)... learn more on Wednesday January 11, 2017 around 5 pm.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. I do research for my own edification and I am willing to share. I write what I think and I may or may not be correct.

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  1. Appreciate the analysis. However it's apples and oranges to compare the 1983 purchase price with the 2016 dividend without adjustments. The 7.37 purchase price would cost you 16.04 in 2016 bucks according to the BoC inflation calculator. Thus the div growth is good but more moderate once inflation is factored in.

    1. Yes, you are right, I did not take into account inflation.