Gyroscopic Investing

http://www.dividend-calculator.com/yoc. ... =Calculate

Yield on Cost Calculator

You want to know how your yield on cost and income will grow if you bought 200 shares of a $50 stock for a total investment cost of $10000. Your stock started with a 4% yield and has an annual dividend growth rate of 10%. You plan to hold this investment for 25 years.


Year | Annual Income | Yield on Cost | Holdings Value
1 $400.00 4.00 $10400.00
5 $702.13 7.02 $12691.28
10 $1596.88 15.97 $18527.68
15 $4433.22 44.33 $33618.39
20 $16697.88 166.98 $84953.82
25 $99115.70 991.16 $350685.22

I'm wondering where you're going to find this stock that will, over the course of 25 years, maintain its share price and increase its dividend yield by 10% annually!

Odysseusa,

Don't forget about that annoying inflation.  The only thing that matters is purchasing power.

Pointedstick wrote: I'm wondering where you're going to find this stock that will, over the course of 25 years, maintain its share price and increase its dividend yield by 10% annually!

I think a better use of your time would be to build one of these:

That is such a cool car.

Gosso wrote: Odysseusa,

Don't forget about that annoying inflation.  The only thing that matters is purchasing power.

Pointedstick wrote: I'm wondering where you're going to find this stock that will, over the course of 25 years, maintain its share price and increase its dividend yield by 10% annually!

I think a better use of your time would be to build one of these:

Totally awesome! I love parking lots as investments.  Especially in high traffic downtown areas where people can't otherwise find an easy place to park!!

Dear Ladies and Gentlemen

Yield on cost works when it is 25 years or more. Please be patient...

Odysseusa wrote: Dear Ladies and Gentlemen

Yield on cost works when it is 25 years or more. Please be patient...

The math certainly adds up, but I still don't see where we're going to find a stock with the required characteristics. Or were you thinking of continuously swapping the money out into whatever stock exhibits characteristics closest to ideal?

I think it's more realistic to have an average dividend raise of 6%. And maybe start with a yield of 2%.
So...start with more than $10,000.

On the other hand, I'm currently getting 4% (on cost, not holdings value) on the dividend stocks I've been holding for years.
But, I have no idea how fast the divs will grow. Maybe they'll even shrink. I guess I'll have to live another 25 years to find out.

The example below is more realistic, with 3% yield and 7% dividend growth rate. At the end of 35 years, we can get a $100,000 annual income.



http://www.dividend-calculator.com/yoc. ... =Calculate

Yield on Cost Calculator

You want to know how your yield on cost and income will grow if you bought 200 shares of a $50 stock for a total investment cost of $10000. Your stock started with a 3% yield and has an annual dividend growth rate of 7%. You plan to hold this investment for 35 years.


With Reinvestment
Year Income Yield on Cost Holdings Value
1 $300.00 3.00 $10300.00
2 $330.63 3.31 $10630.63
3 $365.13 3.65 $10995.76
4 $404.11 4.04 $11399.87
5 $448.29 4.48 $11848.16
6 $498.53 4.99 $12346.69
7 $555.87 5.56 $12902.56
8 $621.56 6.22 $13524.12
9 $697.11 6.97 $14221.23
10 $784.35 7.84 $15005.58
11 $885.55 8.86 $15891.13
12 $1003.45 10.03 $16894.58
13 $1141.50 11.41 $18036.08
14 $1303.92 13.04 $19340.00
15 $1496.07 14.96 $20836.07
16 $1724.62 17.25 $22560.69
17 $1998.09 19.98 $24558.77
18 $2327.30 23.27 $26886.07
19 $2726.19 27.26 $29612.26
20 $3212.81 32.13 $32825.07
21 $3810.68 38.11 $36635.75
22 $4550.78 45.51 $41186.53
23 $5474.19 54.74 $46660.72
24 $6635.90 66.36 $53296.61
25 $8110.20 81.10 $61406.81
26 $9998.44 99.98 $71405.25
27 $12440.26 124.40 $83845.52
28 $15630.15 156.30 $99475.66
29 $19841.93 198.42 $119317.59
30 $25465.68 254.66 $144783.27
31 $33063.82 330.64 $177847.09
32 $43457.54 434.58 $221304.63
33 $57861.89 578.62 $279166.52
34 $78099.68 781.00 $357266.20
35 $106945.28 1069.45 $464211.48

I think 7% is still too high.

I just checked the dividend CAGR of two stocks that I've held for five years.
If I did my math right, McDonald's div has grown 13.3% annually, while that of Verizon has only a 4.3% CAGR over the same 5 years.
* That's only 5 years.
* I think that, on average, you're going to find more Verizon's than McD's.
* Even if you tried to put all your eggs in one basket, a company with promising dividend growth like McDonald's, that's an awful lot of capital to risk on one company- if you reinvest those dividends back into the same company.

I love rising dividends, but that website is giving us false hope.

Pointedstick wrote:

Odysseusa wrote: Dear Ladies and Gentlemen

Yield on cost works when it is 25 years or more. Please be patient...

The math certainly adds up, but I still don't see where we're going to find a stock with the required characteristics. Or were you thinking of continuously swapping the money out into whatever stock exhibits characteristics closest to ideal?

Here is a reality check.

Check out Johnson and Johnson's dividend history: http://www.investor.jnj.com/divhistory.cfm.  In June 2012, JNJ paid a quarterly dividend of $0.61 per share.  Back in June 1987, the company paid a quarterly dividend of $0.02625 per share (on a split-adjusted basis).  In 25 years, in other words, the company increased its dividend 23-fold.  Since JNJ yields about 3.5% right now, a $10,000 investment today would yield $350 of income per year now.  If the 23-fold growth rate holds over the next quarter century (and who knows if it will), the dividend income will grow to around $8,000 per year by 2037.

I like to invest in Dividend Aristocrats (http://www.dividendgrowthinvestor.com/2 ... -2012.html) for my retirement account, especially when they are designated Wide Moat by Morningstar.  (I'm also long JNJ, along with many other wonderful businesses that have a long track record of paying an increasing stream of dividends.)

By contrast, the long-term growth rate of the Permanent Portfolio is around 8% a year (based on how PRPFX has done since inception: 7% a year + ~1% expense ratio).  According to the Rule of 72 (http://en.wikipedia.org/wiki/Rule_of_72), it takes the Permanent Portfolio 9 years to double in value on average.  After 27 years, it should double three times, for an 8-fold increase over a quarter century.  I have less than 2% of my financial assets in the Permanent Portfolio (in the form of PFPFX), but I'm planning on adding more to this investment approach during the coming years for the purpose of diversifying my investment strategies.

At a 3% rate of increase, it takes 24 years for inflation to double the cost of something (http://www.multpl.com/inflation/).  Both dividend growth (in the right dividend-growth stocks) and the Permanent Portfolio have outrun inflation in the past.  But I have no way of knowing what is going to happen in the future.

LifestyleFreedom wrote: The math certainly adds up...

No it doesn't. Your equations fail to solve for X. Over 25 years, X could be very significant.

Here are some companies that have dividend yield of over 3%,
payout ratio of under 70%, dividend 5 year growth rate of at least 10%.
I use www.FinViz.com and www.Reuters.com for my sources.
Please correct me if the data is wrong. Thank you.


Procter & Gamble Co (PG)
Dividend Yield 3.79
Dividend Yield - 5 Year Average 2.74
Dividend 5 Year Growth Rate 11.37
Payout Ratio(TTM) 62.46

Philip Morris International Inc (PM)
Dividend Yield 3.67
Dividend Yield - 5 Year Avg.
Dividend 5 Year Growth Rate (This one should be at least 10%.  I calculate it manually using 4 years from 2008 to 2012).
Payout Ratio(TTM) 58.57

Intel Corp (INTC)

Dividend Yield 3.23
Dividend Yield - 5 Year Avg. 2.79
Dividend 5 Year Growth Rate 14.36
Payout Ratio(TTM) 33.02

Read this: http://www.retailinvestor.org/truths.html#divreturns

Sections 7, 8, and 9 pertain to the claims surrounding dividend investing.  Just realize there is nothing magical about dividends, they are simply a part of the total return of a stock.  The only thing that matters is if that company is making a profit...dividends come from the profit, or else they are eating their own tail to pay the dividend which will hurt your stock price.

There is nothing wrong with buying boring-mature-bluechip stocks, but don't be under the illusion that you'll be earning a 200% return once the YOC creeps up over the years.

There is no such thing as a free lunch.

Gosso wrote: Read this: http://www.retailinvestor.org/truths.html#divreturns

Sections 7, 8, and 9 pertain to the claims surrounding dividend investing.  
...

That was a lot of info to wade through (and the English is somewhat sloppy), but very informative. I think I'm finally able to grasp the problem.
To invest in dividend growth or not- this has always been a huge dilemma for me. I know the bogleheads aren't gaga for it. I think most pp'ers aren't very interested in pursuing it. Buying an index fund is far more important.

I think my problem has been to look at rising dividends in a vacuum, which means I've been ignoring the opportunity cost.
I was lucky enough to start with a fairly large sum. I reinvested my dividends, but not into the same stock that produced the dividend. Instead, I focused on diversifying, buying a new stock in a new sector when enough cash accumulated, so that it if one stock collapsed or cut its dividend, another would take its place.
In the end, money is only worth something if you can spend it, and having income without selling shares sounded good to me.

During the past decade, watching the S&P index return nothing, I have had new cash to invest thanks to dividends. Psychologically it's easy to fall under the spell of these rising payouts. But, you really do have to focus on the yield you can get now rather than on yield-on-cost to fully grok it. Gosso's link helps.

dualstow wrote:

Gosso wrote: Read this: http://www.retailinvestor.org/truths.html#divreturns

Sections 7, 8, and 9 pertain to the claims surrounding dividend investing.  
...

That was a lot of info to wade through (and the English is somewhat sloppy), but very informative.

Maybe that's because it's written in Canadian-ese.   It is a bit long, but well worth it if one wants a deeper look at dividend investing, and why it might not be as lucrative as it seems.

dualstow wrote: I think I'm finally able to grasp the problem.
To invest in dividend growth or not- this has always been a huge dilemma for me. I know the bogleheads aren't gaga for it. I think most pp'ers aren't very interested in pursuing it. Buying an index fund is far more important.

I think my problem has been to look at rising dividends in a vacuum, which means I've been ignoring the opportunity cost.
I was lucky enough to start with a fairly large sum. I reinvested my dividends, but not into the same stock that produced the dividend. Instead, I focused on diversifying, buying a new stock in a new sector when enough cash accumulated, so that it if one stock collapsed or cut its dividend, another would take its place.
In the end, money is only worth something if you can spend it, and having income without selling shares sounded good to me.

During the past decade, watching the S&P index return nothing, I have had new cash to invest thanks to dividends. Psychologically it's easy to fall under the spell of these rising payouts. But, you really do have to focus on the yield you can get now rather than on yield-on-cost to fully grok it. Gosso's link helps.

Dividends are a strange thing, and are tricky to wrap ones brain around.  IMO, they only make sense if the company is sitting on a pile of cash, and doesn't have any use for it (ie Apple).  I'd rather have the company hold onto the cash and then use it once an opportunity presents itself.  But managers of these dividend companies seem to have been forced by their shareholders to provide a constant and steady dividend.  I don't know if this is a good or bad thing (ie prevents companies from wasting money on bad investments, although I want a company to take some risks...).

I would much rather see a dividend than a share buyback.

Share buybacks just seem like a dumb idea to me.  Are companies somehow supposed to be better at predicting where their own stock is going to go than other investors?  Clearly this has not been the case in practice.

It seems like a lot of dividends are reinvested anyway, so paying a dividend is sort of like a buyback, but it puts the power in the hands of shareholders rather than management.

A company like Apple really should be paying a dividend of 5% or so.  Within that sector I really like Intel's dividend, which is currently at 3.2%, but is about 4.9% based upon the price I bought it at a couple of years ago.

I found an interesting link via Bogleheads. If the link doesn't take you directly there, you can search for "dividend puzzle" or navigate to page 10.
{ Google Books, Streetwise }

MediumTex wrote: I would much rather see a dividend than a share buyback.

See now if you're into dividends I have to take another look, just as I was ready to steer away from them. 

Gosso wrote:Maybe that's because it's written in Canadian-ese. 

Ha! I was just listening to David Letterman making fun of Justin Bieber.
http://www.youtube.com/watch?v=bhpJC1FRTtI

MediumTex wrote: Within that sector I really like Intel's dividend, which is currently at 3.2%, but is about 4.9% based upon the price I bought it at a couple of years ago.

But the Yield-On-Cost of 4.9% is a meaningless figure, since it ignores the price change of the stock.  If there was a similar stock with a current yield of 4.0%, it would make sense to sell the Intel shares and buy the stock yielding 4.0% (since Intel's current yield is 3.2%).  That 4.9% tells us nothing about how the stock is currently performing.

dualstow wrote: I found an interesting link via Bogleheads. If the link doesn't take you directly there, you can search for "dividend puzzle" or navigate to page 10.
{ Google Books, Streetwise }

Thanks for the link.  It's good to have another source backup the one I linked to.  At one point I was very interested in dividend investing, but the more I learned the less it made any sense.  I now see a dividend as a forced sale of the company's assets (ie the cash), which then simply detracts from the stock price.  

There is nothing wrong with dividends, and I too get a warm fuzzy feeling when "free" money shows up in my account, but if you dig deeper then one realizes it was simply sliced off the side of the stock price.

Gosso wrote:

MediumTex wrote: Within that sector I really like Intel's dividend, which is currently at 3.2%, but is about 4.9% based upon the price I bought it at a couple of years ago.

But the Yield-On-Cost of 4.9% is a meaningless figure, since it ignores the price change of the stock.  If there was a similar stock with a current yield of 4.0%, it would make sense to sell the Intel shares and buy the stock yielding 4.0% (since Intel's current yield is 3.2%).  That 4.9% tells us nothing about how the stock is currently performing.

You're right, but it still feels good to have your initial investment throwing off a nice income stream.  I just like Intel overall as a long term investment.

MediumTex wrote:

Gosso wrote:

MediumTex wrote: Within that sector I really like Intel's dividend, which is currently at 3.2%, but is about 4.9% based upon the price I bought it at a couple of years ago.

But the Yield-On-Cost of 4.9% is a meaningless figure, since it ignores the price change of the stock.  If there was a similar stock with a current yield of 4.0%, it would make sense to sell the Intel shares and buy the stock yielding 4.0% (since Intel's current yield is 3.2%).  That 4.9% tells us nothing about how the stock is currently performing.

You're right, but it still feels good to have your initial investment throwing off a nice income stream.  I just like Intel overall as a long term investment.

For sure.  The dividend makes it easy for people, since they don't have to think about their account or deal with having to sell a certain amount of shares.

I think the way to do dividends properly is to do it on large moat, established company stocks that are so big and entrenched in their brands, that it is a practical impossibility for new projects to significantly add to top line growth.

Within this narrow universe, you can be sure to find those that have been and are growing their dividends each year that outpaces the rate of inflation or double digits.  Lets call these survivors Mega Dividend Growers.

Reinvesting the dividend payouts ala DRIP, however, is a bad idea because it will happen while the stock price is overvalued (recall the Nifty Fifty) just as when they are undervalued (recall post-Black Monday).  It is far better to keep the dividend payments in cash and wait for fire sales on your Mega Dividend Growers.

I just question how much this adds to the PP stock portion vs volatility rebalancing and whether it is even worth spending the time, worry and intellect.  Sure, you can "set it and forget it", but after 30 years or so, you may seriously regret not capturing a few more percentage points of CAGR...

Generally though, over time, both growth and value return approximately the same CAGR.  If this is reflected in the PP's portfolio with broad stock indexes, then any additional juice could be worth it.

Gosso wrote:

MediumTex wrote: Within that sector I really like Intel's dividend, which is currently at 3.2%, but is about 4.9% based upon the price I bought it at a couple of years ago.

But the Yield-On-Cost of 4.9% is a meaningless figure, since it ignores the price change of the stock.  If there was a similar stock with a current yield of 4.0%, it would make sense to sell the Intel shares and buy the stock yielding 4.0% (since Intel's current yield is 3.2%).  That 4.9% tells us nothing about how the stock is currently performing.

At the same time, we have to make sure the current yield is not merely the result of a recent drop in share price. Depending on the reason for the drop, it could portend a subsequent lowering of the dividend.

I think when I started buying Altria (Philip Morris), I cared more about the dividend than the share price, comparing it to a savings account that rewarded me with higher interest for staying with them year after year. In my mind, I called it the Bank of Marlboro.