How does yield on cost sit in the HYP world?

[EssDeeAitch]

How does yield on cost sit in the HYP world? I would imagine that it is more important than current or future yield. Do HYPpers use this measure? If no, why not.

This question is NOT to try to undermine/question/debate HYP in any way but rather to understand more about how HYP is managed.

Moderator Message:
This topic split off from a discussion that started out elsewhere. - Chris

[Dod101]

How does yield on cost sit in the HYP world? I would imagine that it is more important than current or future yield. Do HYPpers use this measure? If no, why not.

This question is NOT to try to undermine/question/debate HYP in any way but rather to understand more about how HYP is managed.

I do not understand why anyone would use yield on cost. Assuming you mean current yield on cost I cannot see how that helps in any way to evaluate a share today. I will have a share that I may have held for 25 years and the yield on cost could be 100%. Does that make me clever? Of course not. What matters is current yield and from that you can fairly compare one share in your portfolio with another. I use current price against actual dividends received in the previous 12 months. I tend only to do that calculation once a year.

But is this relevant to the OP's question?

Dod

[onthemove]

How does yield on cost sit in the HYP world? I would imagine that it is more important than current or future yield.

I'm curious as to why you think yield on cost is even relevant, let alone more important than anything else.

Cost price is history. There's no guarantee it will ever be available again. So I'm not sure what practical consideration yield on cost price could be, at all, to anyone making practical decisions in relation to a high yield portfolio.

Any practical decision that you might take now should be based on the reality now.

If you're making a decision what to do now, then it is the facts in the moment that count.

While there may be psychological / sentimental aspects that come into play - like not wanting to crystalise a loss - these don't however concern a rational, dispassionate investor.

Simple example...

You have two investors each holding company X, both have the same number of shares.

Investor 1 decides to sell and shift the proceeds into a higher yielding share, company Y.

There's no rational reason (other than potentially tax concerns) why Investor 2 would choose not to, purely on the basis that his original purchase price was different compared to Investor 1.

Investor 2 has exactly the same opportunity to effect the same increase in dividend as investor 1, as it is the price and dividend now that matters, not the price each respectively paid for their investments nor the dividend they were paying at the time of purchase.

Looking at it another way, why would you choose dividend now vs cost at purchase?.. That would be no more sensible than vice versa... using dividend at purchase time vs cost now.

It is the yield now that determines whether you can achieve a better income by shifting to another investment.

And the yield now is the dividend now vs the share price now.

The current share price is the only price available.

In practical terms, other than perhaps tax purposes (CGT, etc), I cannot see why would you base a decision on a price that isn't available to you. The price you originally paid has gone, it's history, it's no more, it's not relevant (other than tax) to decisions you might make now.

So what meaningful purpose could yield on cost actually provide?

I'd be curious why you imagine yield on cost would be more important than the actual real world right now in which you're making any decision.

[EssDeeAitch]

Well Dod101 and OnTheMove have firmly put me in my place.

No point in engaging whatsoever is there.

[onthemove]

Well Dod101 and OnTheMove have firmly put me in my place.

No point in engaging whatsoever is there.

Excuse me?

Have you ever seen anyone make decisions on here based on yield-on-cost?

Have you seen anything in the HYP or HYP-P board guidelines that says people should prefer yield-on-costs?

Have you seen anyone managing their HYP using yield-on-cost?

I haven't

You are the one that raised the question, but you gave no rationale as to how you arrived at your - you admitted yourself - 'imagined' assumption that it should be more important.

So without any rationale provided on your part as to why you imagined it, what were you expecting from others?

Unless you provide some grounds as to how you reached your imagined assumption, 'it' is just that - 'imagined'.

What engagement were you expecting with an imagined - some might call it a 'straw man' - assumption?

If you've genuinely seen others using yield-on-cost, and it was that which perked your curiosity, then fair enough, but if so, it would be useful if you could provide a link / reference / quote, so that we can see where you're coming from, and those of us who don't use yield-on-cost, could therefore stay out of the discussion and allow those who do use it, those who you might be quoting or referencing, to explain their own rationale.

But in the absence of any such reference, nor seeing any such use myself, it came across as though you were generating the assumption yourself, and throwing it open to anyone to respond.

Which we did.

[Dod101]

Well Dod101 and OnTheMove have firmly put me in my place.

No point in engaging whatsoever is there.

We can't answer a question and keep tiptoeing around in case we upset someone. You asked a question, I did not my best to answer it and to justify my answer. Others will have a different take and that is what makes for a discussion Board. I certainly was not intending to 'put you in your place'. If you do not agree with my reply then please say so and tell me where you disagree; then maybe we all learn something.

Dod

[Arborbridge]

How does yield on cost sit in the HYP world? I would imagine that it is more important than current or future yield. Do HYPpers use this measure? If no, why not.

This question is NOT to try to undermine/question/debate HYP in any way but rather to understand more about how HYP is managed.

I do not understand why anyone would use yield on cost. Assuming you mean current yield on cost I cannot see how that helps in any way to evaluate a share today. I will have a share that I may have held for 25 years and the yield on cost could be 100%. Does that make me clever? Of course not. What matters is current yield and from that you can fairly compare one share in your portfolio with another. I use current price against actual dividends received in the previous 12 months. I tend only to do that calculation once a year.

But is this relevant to the OP's question?

Dod

Ditto all of that.
I do look at yield on cost but it is only out of idle curiosity - it's a comfort blanket at best and has no relevant to my shareholding decisions or as a mark of my success or otherwise. The longer I have held a share, the better it looks... (surprise!)


Arb.

Moderator Message:
This topic split off from a discussion that started out elsewhere. - Chris

[dealtn]

I don't select on Yield, nor follow a strict rules based system.

I do keep records of my investments. My ideal timeframe is very short, and hope never to hold a share long enough to receive a dividend, though of course that is a rare occurrence!

One of the things I will do though is make a note of every dividend, as that is part of my Total Return, and in so doing I also note the "progress" of that dividend stream, such that I know how much that total dividend received is as a % of my initial investment, and also how much the current dividend is forecast to be as a similar % of that initial investment.

As I say I don't use yield as an investment metric anyway, and I wouldn't be using either of these "on cost" measures as part of any criteria for selection were I disposed to use "yield". They do however prove a useful "simple" benchmark (in addition to change in price - hopefully upwards!) as a quantifier of the "success" of the investment. Of course "time invested" is a huge part of this too, so needs to be factored in as well. But that is part of the less simple benchmark of success such as XIRR/Total Return.

I don't see why a HYP investor couldn't do something similar to measure "success" (even if that ignored capital value change), but can't see its relevance to any decision to select shares. I can see how it might be a tool in deciding how successful a share previously selected might be, in the potential position of choosing to sell (if that's allowed) or not. I suspect there are alternative, and perhaps easier ways, of making this analysis though. I am on shakier ground here though as I don't follow this strategy.

(Posted as it has been pointed out to me by Gengulphus that the guidelines addresses the issue of "for the use" of HYP followers, so doesn't exclude non-HYPers on this Board so long as they are providing useful information to HYPers)

[tjh290633]

How does yield on cost sit in the HYP world?

The simple answer is that it comes into the equation when buying a share for the first time. It also features when topping up a share, but only in respect of the shares being bought, not those already held.

Once you have the share, it is of little consequence but is just of academic interest. I like to know the yield when first bouight, and frequently refer to that when commenting on a share. The price when first bought is also of interest. I can tell you, for example, that AstraZeneca was split off from ICI on 1st June 1993 as Zeneca, at 630p with a starting yield of 4.37%. The rate of return has been 16.2% for my holding since that date with various top-ups and trimmings along the way. Not a lot of help to anyone wanting to buy them at £85+ today.

TJH

[GoSeigen]

I can tell you, for example, that AstraZeneca was split off from ICI on 1st June 1933 as Zeneca, at 630p with a starting yield of 4.37%. The rate of return has been 16.2% for my holding since that date with various top-ups and trimmings along the way. Not a lot of help to anyone wanting to buy them at £85+ today.

You were trading in the womb?!! My hat off to you sir!

GS

[scrumpyjack]

How does yield on cost sit in the HYP world?

The simple answer is that it comes into the equation when buying a share for the first time. It also features when topping up a share, but only in respect of the shares being bought, not those already held.

Once you have the share, it is of little consequence but is just of academic interest. I like to know the yield when first bouight, and frequently refer to that when commenting on a share. The price when first bought is also of interest. I can tell you, for example, that AstraZeneca was split off from ICI on 1st June 1933 as Zeneca, at 630p with a starting yield of 4.37%. The rate of return has been 16.2% for my holding since that date with various top-ups and trimmings along the way. Not a lot of help to anyone wanting to buy them at £85+ today.

TJH

I think you mean 60 years later (1993)

[tjh290633]

I can tell you, for example, that AstraZeneca was split off from ICI on 1st June 1933 as Zeneca, at 630p with a starting yield of 4.37%. The rate of return has been 16.2% for my holding since that date with various top-ups and trimmings along the way. Not a lot of help to anyone wanting to buy them at £85+ today.

You were trading in the womb?!! My hat off to you sir!

GS

I see what you mean, that should be 1993. Thanks for pointing it out. I only inherited ICI in 1970.

TJH

[tjh290633]

How does yield on cost sit in the HYP world?

The simple answer is that it comes into the equation when buying a share for the first time. It also features when topping up a share, but only in respect of the shares being bought, not those already held.

Once you have the share, it is of little consequence but is just of academic interest. I like to know the yield when first bouight, and frequently refer to that when commenting on a share. The price when first bought is also of interest. I can tell you, for example, that AstraZeneca was split off from ICI on 1st June 1933 as Zeneca, at 630p with a starting yield of 4.37%. The rate of return has been 16.2% for my holding since that date with various top-ups and trimmings along the way. Not a lot of help to anyone wanting to buy them at £85+ today.

TJH

I think you mean 60 years later (1993)

I did indeed.

TJH

[88V8]

How does yield on cost sit in the HYP world? I would imagine that it is more important than current or future yield. Do HYPpers use this measure? If no, why not.

It's a useful reminder of why one bought the share.
But it says nothing about the share's merits now. Whether it's still earning its keep.
In terms of portfolio management, I would regard it as a meaningless metric.

V8

[Itsallaguess]

In terms of portfolio management, I would regard it as a meaningless metric.

I'd go further than that, given that we're on the HYP Practical Board and we're supposed to be income-investors..

For income-investors, it's not only meaningless, it's actually dangerously so, because anyone using it can be blinded to the potentially lost 'opportunity cost' of alternative uses of their invested capital that might well be able to yield improved income elsewhere.

The major problem with yield on cost figures over long periods, is that more often than not, subsequent increases in the price of a share begin to seriously distort these 'yield on cost' figures, and often to such a large degree that 'true-yield' alternatives might be ignored.

Take this example -

1. We buy a share 10 years ago for 100p, and it paid a 4p dividend then. The yield at the time was therefore 4p/100p = 4%

2. Fast forward 10 years, and the share price is now 800p, and it's paying a 15p dividend.

3. The 'Yield on Cost', for those interested, is now 15p/100p = 15%. (Sounds great, doesn't it - there's the comfort blanket feeling right there...)

4. The 'Current Yield', however, is 15p/800p = 1.875%......(Maybe not so good compared with many possibly higher-yielding alternatives we may wish to consider....)

It's a comfort blanket metric based on historical facts. A bit like your uncle telling you that he used to pay 10p for a pint in 1966....

That's great Uncle Bill - but knowing that isn't going to get me a 10p pint today, is it...

Cheers,

Itsallaguess

[scrumpyjack]

Yes, it doesn’t mean much except as partly an indicator of whether you made a good investment with the benefit of 20:20 hindsight.

But, as I understand it, the HYP philosophy is that the current share price doesn’t matter, nor yesterday’s not the day after tomorrow, so what does it matter which price you compare the yield to? In fact on that basis what you paid for it is the only price that is actually real isn’t it?

Indeed if, as some assert, today’s share price is the current discounted value of all future dividends and returns from that share, the current yield doesn’t matter either because, if it is low, it simply means the market expects it to rise in future more quickly than another share with a higher current yield.

[NeilW]

How does yield on cost sit in the HYP world? I would imagine that it is more important than current or future yield. Do HYPpers use this measure?

I tend to use yield on cost, as I try to treat my HYP as though I was buying stakes in unlisted firms. It's another trick to avoid constantly checking capital prices and unnecessary trading.

Yield on cost helps work out those that are bad investments too. If the yield on cost is going down then it is likely that the share is heading for a cut, or is using trickery to dilute shareholders.

I deduct returns of capital from cost as you would expect but otherwise try and keep the cost pot unchanged.

[NeilW]

Indeed if, as some assert, today’s share price is the current discounted value of all future dividends and returns from that share

It never is. The whole discounting the future idea is a theoretician trying to explain a fairly random walk. I quite like the following formula

Price = (expected flows x hype) / (perceived risk x risk free return)

The (Hype / Perceived risk) modifier appeals to my cynicism.

[NeilW]

because anyone using it can be blinded to the potentially lost 'opportunity cost' of alternative uses of their invested capital

I don't see it like that. There is no free lunch (or at least its not completely free), so all you are doing there is doubling down on the risk that the 'new' investment won't turn out to be a clunker.

HYP runs its winners and cuts its losers in a particular way that is similarly to the PYAD value investment approach. You need those running winners to offset the inevitable clunkers.

Switching around increases the clunker risk.

And of course it isn't either or. The yield on cost gives one set of information, whereas the yield on price gives another. Both are useful and you weight them according to your investment styles.

[CryptoPlankton]

In terms of portfolio management, I would regard it as a meaningless metric.

I'd go further than that, given that we're on the HYP Practical Board and we're supposed to be income-investors..

For income-investors, it's not only meaningless, it's actually dangerously so, because anyone using it can be blinded to the potentially lost 'opportunity cost' of alternative uses of their invested capital that might well be able to yield improved income elsewhere.

The major problem with yield on cost figures over long periods, is that more often than not, subsequent increases in the price of a share begin to seriously distort these 'yield on cost' figures, and often to such a large degree that 'true-yield' alternatives might be ignored.

Take this example -

1. We buy a share 10 years ago for 100p, and it paid a 4p dividend then. The yield at the time was therefore 4p/100p = 4%

2. Fast forward 10 years, and the share price is now 800p, and it's paying a 15p dividend.

3. The 'Yield on Cost', for those interested, is now 15p/100p = 15%. (Sounds great, doesn't it - there's the comfort blanket feeling right there...)

4. The 'Current Yield', however, is 15p/800p = 1.875%......(Maybe not so good compared with many possibly higher-yielding alternatives we may wish to consider....)

I'm confused! Surely the subsequent share price has no impact at all on the "yield on cost"? In your example, pick any price ten years down the line (100p, 400p, whatever) and the yield on cost is still 15%! However, it's certainly true that the yield on cost tells us nothing about current yield, which is probably what you mean?

I think "dangerously meaningless" is a bit OTT! Have we actually read of anyone who has made a tinkering decision for their HYP based on the "yield on cost" of one of their holdings? I'd like to give people a little more credit than that. I've never looked at it myself, but, apart from the "comfort blanket" effect, I can see one possible application if anyone had the time and inclination:

If someone wants a low-maintenance (i.e. only forced tinkering) HYP to tuck away so that it generates a high and growing income then clearly, further down the line, the higher the yield on the original cost the better bang for the buck they will end up receiving. To that end, it may be worthwhile to backtest different types of shares (in terms of both quantitative and qualitative factors) to compare yields on cost from points in the past. One obvious comparison would be a share with a lower initial yield, but higher dividend growth rate against a higher yielding, slower dividend-growing share. If say, I found that after ten years the lower initial yield was providing a greater yield on cost then, regardless of the current yield, it would be giving me more income now than an equivalent investment in the higher yielder ten years ago. Of course, like any historical data, this doesn't tell us what will happen in the future, but it may have some potential in the share selection process for someone looking at long-term income projections.

I'm not particularly advocating this, nor is it a parameter I personally give any thought to, but I don't think yield on cost is necessarily totally meaningless. I certainly don't think it is dangerous in itself. It may be that some people enjoy its "comfort blanket" qualities, but I haven't seen any evidence that it has caused bad investment decisions.