Durable Dividends

Don’t Let High Yields On Cost Fool You

Nick Ward

56 postsNovember 12, 2021

When I think about Durable Dividends, I think about the classic Jim Cramer line, “My job is not just to entertain you, but to educate and teach you.”

As far as in-depth equity analysis goes, my work there is generally locked up behind paywalls. And frankly, I think it makes sense for that content to be exclusive to subscribers. Not everyone is going to be interested in deep-dive research and the specific due diligence that I perform when making portfolio management decisions. But, I think there are articles that every dividend growth investor is going to want to read and consider. Those are exactly what I aim to produce here for members of Durable Dividends.

My hope has always been that Durable Dividends will provide higher level, evergreen content which can be of use to dividend growth investors, no matter their experience levels and where they stand on along the journey towards financial freedom. It’s difficult to touch upon topics that matter to investors who are in either the accumulation phase or the distribution phase of their dividend growth journeys. However, this week a discussion that I came across in the Dividend Kings chatroom over at Seeking Alpha inspired me to write this piece.

Today, I’ll be talking about an interesting, and somewhat controversial topic within the dividend growth community: yield on cost.

This is a metric that many dividend growth investors like to track because it is a very simple, quick, and easy way to measure the success of an investment (and the dividend growth strategy overall).

When you own stocks that generate reliable dividend growth, over the long-term, your yields on cost should be rising.

This is great to see. I’d be lying if I said that I didn’t pay attention to yield on cost when thinking about my long-term positions. It’s a fairly tangible way to see whether or not a dividend growth investment is working or not.

It’s fun to check on positions that you bought 5 or 10 years ago at prices that are much lower than those which can be found in the market today and see that their dividend growth has pushed my yield on cost on those long-term holdings up to a level that is twice, three times, or more, as high as the yield that is generally associated with that particular company.

I imagine that it’s even more fun to look at stocks that you’ve held for decades and decades and see yields on cost that have risen into the double digit range. There are even companies that have generated such strong share price appreciation and then dividend growth over the years that long-term investors have triple digit yields on cost. It must be amazing to know that every year a company is paying out a dividend that is just as large as one’s original investment.

However, as amazing as this scenario sounds, I think it’s very important to note that while high yields on cost show that the dividend growth strategy is working, this metric is all about past performance and frankly, in the present (and more importantly, moving forward), it means very little.

To me, a focus on yield on cost is more about vanity than anything else.

Let me explain why.

I’ll use one of my personal positions to show how paying too much attention to yield on cost could end up hurting someone who is making income oriented investment decisions…

I began accumulating shares of Apple (AAPL) years ago, shortly after the company initiated its shareholder dividend in 2012.

Obviously, AAPL has been a big winner over the last decade or so (over the last 10 years, AAPL’s share price has risen approximately 976%).

I’ve added to my position on dips throughout the years and my current cost basis for AAPL is $24.26.

Today, AAPL pays an annual dividend of $0.88/share.

This means that my yield on cost is 3.63%.

This sounds great right? Apple shares yield just 0.6% right now. What dividend growth investor wouldn’t love to purchase AAPL shares today with a 3.6% yield attached to them?

But, the fact is, that line of thought shouldn’t be used as the sole reason to hold on to AAPL shares today.

Why? Because that 0.6% dividend yield that Apple provides in the present is the real yield that shareholders receive. This is the only yield that matters when comparing AAPL shares to every other passive income generating asset in the market today.

For instance, even though my yield on cost on AAPL is 3.6% right now, if I were trying to boost my passive income stream, I could sell Apple here at $150/share with a 0.6% yield attached and buy shares of say, Coca-Cola (KO), which are trading in the $60 range at the moment and yield approximately 3%. If I were to make this trade, I would increase my annual dividend income by nearly five-fold.

To make this more clear, let’s say that I own 10 shares of Apple trading for $150. These 10 shares generate $8.80 in annual dividend income.

Well, if I were to liquidate those shares, generating $1,500 in cash, I could use those proceeds to buy 25 shares of KO at $60.00. Those 25 KO shares, which provide an annual dividend of $1.68/share right now, would generate $42.00 in dividend income.

So, while I would be trading in AAPL shares with a 3.6% yield on cost for KO shares which only yield 3.0% in the present, I would still be putting myself in a situation to drastically increase my passive income by making this trade.

Why? Because the only yield that matters when making real-time income oriented decisions in present yield.

Now, to be clear, I am not interested in making such a trade because I believe in the long-term prospects of AAPL shares and therefore, I’m very content to hold onto my position.

For what it’s worth, I also own a large position in KO and I’m pleased to hold those shares over the long-term as well because I like having exposure to this wonderful defensive consumer staple in my portfolio as well.

I believe that both companies will continue to provide reliable dividend growth to shareholders over the long-term and therefore, I think there’s a place for both within my well diversified dividend growth portfolio.

This scenario wasn’t meant to say that investors should always be trading in lower present yields for higher one. Obviously things like asset allocation, margin of safety, and forward looking growth prospects should be strongly considered as well when dividend growth investors are thinking about making trades. This AAPL/KO scenario was just meant to show that yield on cost isn’t a metric that income oriented investors should be considering when they’re hoping to bolster the size of their passive income stream because what’s in the past is in the past.

All that matters when making investments in the present is what happens today, and every day there after.

And with this in mind, getting too caught up in joyous high yield on cost figures and allowing this trailing, largely vanity-driven metric is likely to be a detriment to those looking to take active steps when managing their portfolios to increase the size of their passive income streams.

Nick Ward

56 posts

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Nicholas Ward is a research analyst who currently writes for Seeking Alpha, The Dividend Kings, iREIT, and Forbes Real Estate Investor. Before that, he was Founder and Editor-in-Chief of The Dividend Growth Club, as well as the Income Minded Millennial. Nicholas has also contributed to Sure Dividend, Investing Daily, and The Street, where he covered stocks in Jim Cramer's Action Alerts PLUS Portfolio.

Nicholas holds a bachelor of arts from The University of Virginia, where he studied English and studio art. Prior to transitioning into the financial industry, he managed a vineyard in the foothills of the Blue Ridge Mountains.

Let Them Eat Cake! (And 2 More Mergers Make the News)

REIT Mutual Fund	Symbol
Alpine Realty Income and Growth Fund	AIGYX, AIAGX
American Century Real Estate Fund	REAIX, REACX, AREEX, AREWX, ARYCX, AREDX
Real Estate Securities Fund	MRESX
AR Capital Real Estate Income Fund	ARIAX, ARICX, ARIPX
AssetMark Real Estate Securities Fund	AFREX
Aston/Harrison Street Real Estate Fund	AARIX, ARFCX
Baron Real Estate Fund	BREIX, BREFX
BlackRock Real Estate Securities	BIREX, BAREX, BCREX
Brookfield U.S. Listed Real Estate Fund	BRUAX, BRUCX, BRUIX, BRUYX
CGM Realty Fund	CGMRX
West Loop Realty Fund	REIIX, REIAX, REICX
Cohen & Steers Institutional Realty Shares	CSRIX
Cohen & Steers Realty Income Fund	CSEIX, CSDIX, CSBIX, CSCIX
Cohen & Steers Realty Shares	CSRSX
Columbia Real Estate Equity Fund	CREAX, CREIX, CRRVX, CRERX, CREEX, CRRFX, CREWX, CRECX, CREBX
Compass EMP REC Enhanced Volatility Weighted Fund	CWRAX, CWRIX, CWRTX, CWRCX
Davis Real Estate Fund	RPFRX, DREYX, DRECX, DREBX
Delaware Real Estate Investment Trust Portfolio II	DPRTX, DPRBX
Delaware Real Estate Investment Trust Portfolio	DPREX, DPRSX, DPRRX, DPRCX
DFA Real Estate Securities Portfolio	DFREX
Dunham Real Estate Stock Fund	DAREX, DNREX, DCREX
DWS RREEF Real Estate Securities Fund	RRRRX, RRREX, RRRAX, RRRSX, RRRBX, RRRCX
DWS RREEF Real Estate Securities Income Fund	REFAX, REFCX, REFIX, REFSX
Eaton Vance Real Estate Fund	EAREX, EIREX
EII Realty Securities Fund	EIIRX
Fidelity Advisor Real Estate Fund	FHEIX, FHEAX, FHETX, FHECX, FHEBX
Fidelity Advisor Real Estate Income Fund	FRIRX, FRIQX, FRINX, FRIOX
Fidelity Real Estate Income Fund	FRIFX
Fidelity Real Estate Investment Portfolio	FRESX
Fidelity Spartan Real Estate Index Fund	FSRNX, FRXIX, FSRVX
Fidelity Series Real Estate Equity Fund	FREDX, FREFX
Fidelity Series Real Estate Income Fund	FSREX, FSRWX
Forward Real Estate Long/Short Fund	KSRYX, FRLSX, FFSRX, KSRAX, KSRCX, KSRBX
Forward Real Estate Fund	FPREX, FFREX, KREAX, KRECX
Forward Select Income Fund	KIFYX, FSIMX, FFSLX, KIFAX, KIFBX, KIFCX
Franklin Real Estate Securities Fund	FREEX, FRLAX, FRRSX, FSERX
GMO Real Estate Fund	GMORX
Goldman Sachs Real Estate Securities Fund	GREIX, GRETX, GREAX, GRESX, GRERX, GREBX, GRECX
Great-West Real Estate Fund	MXREX
Heitman REIT Fund	OARTX, OBRTX
ING Real Estate Fund	CRARX, IREWX, IDROX, CLARX, CRWRX, CRCRX, CRBCX
INVESCO Real Estate Fund	REINX, IARFX, IARIX, IARYX, IARAX, IARRX, IARCX, AARBX
Ivy Real Estate Securities Fund	IRSAX, IREIX, IRSYX, IRSRX, IREEX, IRSCX, IRSBX
John Hancock Real Estate Securities Fund	JIREX
Johnson Realty Fund	JRLTX
J.P.Morgan Realty Income Fund	URTLX, JRIRX, URTAX, URTBX, URTCX
J.P. Morgan Security Capital U.S. Core Real Estate Securities Fund	CEEAX, CEERX, CEEFX, CEESX, CEECX
J.P. Morgan U.S. Real Estate Fund	SUSIX
Lazard U.S. Realty Equity Portfolio	LREIX, LREOX
Lazard U.S. Realty Income Portfolio	LRIIX, LRIOX
Manning & Napier Real Estate Series	MNRIX, MNREX
Morgan Stanley Institutional U.S. Real Estate Portfolio	MSUSX, MUSDX, MSULX, MURSX
Natixis AEW Real Estate Fund	NRFAX, NRFYX, NRFBX, NRFCX, NRFNX
Neuberger Berman Real Estate Fund	NBRIX, NBRFX, NREAX, NRERX, NRECX, NRREX
Nuveen Real Estate Securities Fund	FREAX, FARCX, FRSSX, FREBX, FRLCX, FREGX
Oppenheimer Real Estate Fund	OREAX, OREIX, OREYX, ORENX, OREBX, ORECX
PHOCAS Real Estate Fund	PHREX
PIMCO RealEstateRealReturn Strategy Fund	PRRSX, PETPX, PETAX, PETDX, PETCX, PETBX
Pioneer Real Estate Shares	PWREX, PYREX, PCREX, PBREX
Principal Real Estate Securities Fund	PIREX, PIRPX, PREPX, PRETX, PREJX, PRRAX, PRERX, PRENX, PRAEX, PRCEX, PRLEX
ProFunds Real Estate UltraSector ProFund	REPIX
Prudential Select Real Estate Fund	SREAX
Prudential U.S. Real Estate Fund	PJEAX, PJEZX, PJECX, PJEBX
REMS Real Estate Income 50/50 Portfolio	RREIX
REMS Real Estate Value-Opportunity Fund	HLRRX, HLPPX
Rydex Real Estate Fund	RYREX, RYHRX, RYCRX
SA Real Estate Securities Fund	SAREX
SEI Institutional Mgd Real Estate Fund	SETAX, SEIRX
Spirit of America Real Estate Income & Growth Fund	SOAAX
SSgA Clarion Real Estate Fund	SSREX
Stratton Real Estate Fund	STMDX
T.Rowe Price Real Estate Fund	TRREX, PAREX
TIAA-CREF Real Estate Securities Fund	TIREX, TRRPX, TRRSX, TCREX
Vanguard REIT Index Fund	VGSNX, VGRSX, VGSLX, VGSIX
Virtus Real Estate Securities Fund	PHRAX, PHRIX, PHRCX, PHRBX

REIT ETF	Symbol
Flex Shares	ASET
Wisdom Tree Global Ex-US	DRW
S&P 500 Equal Weight	EWRE
iShares FTSE Industrial/Office	FNIO
MSCI Real Estate Index	FREL
S&P REIT Index	FRI
First Trust S&P REIT	FRI
iShares Real Estate 50	FTY
Flexshares Global	GQRE
iShares Cohen & Streers	ICF
iShares International Developed RE	IFGL
iShares US RE	IYR
Premium Yield Equity REIT	KBWY
ETRACS Monthly Pay 2x Leverage	MORL
Market Vector Mortgage	MORT
iShares Global REIT	REET
iShares FTSE Mortgage	REM
iShares Residential	REZ
IQ US Real Estate Small Cap	ROOF
iShares FTSE NAREIT Retail	RTL
DOW Jones Global RE	RWO
SPDR Dow Jones	RWR
Schwab US REIT	SCHH
Super Dividend REIT	SRET
ProShares Ultra RE	URE
Vanguard REIT	VNQ
Vanguard Global ex-US	VNQI
iShares International Developed	WPS
Wilshire US REIT	WREI
Pacer Benchmark Data & Infrastructure RE	SRVR
Pacer Benchmark Industrial RE	INDS
Pacer Benchmark Retail RE	RTL
Hoya Capital Housing	HOMZ
NetLease Corporate RE	NETL

REIT Name	Ticker	Annual Increases/yr
Federal Realty	FRT	51
Universal Health Realty	UHT	33
National Retail Properties	NNN	29
Realty Income	O	27
Tanger Outlets	SKT	26
Urstadt Biddle	UBA	25
Essex Property Trust	ESS	25
W.P.Carey	WPC	22
National Health Investors	NHI	17
Equity Lifestyle	ELS	15
Digital Realty	DLR	15

Don’t Let High Yields On Cost Fool You

Nick Ward

56 postsNovember 12, 2021

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Don’t Let High Yields On Cost Fool You

56 postsNovember 12, 2021

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