Initial investment yields

[minerjoe]

The post on Admiral got my thinking about my current yields on initial investments i.e. based on how much I have paid in cash how much am I now getting back in yield. The below table actually gives some interesting feedback. You can see that based only on my cash investments BHP is now paying me almost 27% back in its yield. Even with the fall and dividend cut from Imperial Brands, they are still paying me out nearly 16% on my cash purchases.

As a note I include all cash I have put into the shares but not the capital cost of shares reinvested.

[Gengulphus]

I'm afraid your figures are at least as much (and probably more) statistics about your behaviour as they are statistics about your shares' behaviour. That's basically because the longer you've held a share, the longer it's had to grow its dividend - so of your shares that have done well, the ones that are likely to have the highest yields on purchase cost are the ones you first bought many years ago and haven't topped up (at least significantly) for many years.

As an example from my own HYP, my initial purchase of Halma was at 142p per share in November 2003 and I last topped the holding up in May 2007, at which point my average purchase cost per share became 164.12p. It hasn't changed since, as subsequent top-slicing sales have merely converted some of the shares to (larger amounts of) cash without changing the average purchase cost of each unsold share. Its most recent full-year dividend is 17.65p, giving it a yield on purchase cost of 12.43% on my initial purchase and 10.75% on my full holding. This is on a share whose current price gives it a yield of 0.60%.

As another, my earliest purchase of SSE was a small purchase at 240p in June 1991, when it (then called Scottish Hydro-Electric) was privatised (*). If I'd left it at that, its most recent full-year dividend of 81p would give me a yield on purchase cost of 33.75% on it; as it is, I've topped it up many times since (and top-sliced it on a few occasions), with the result that my current holding contains well over 20 times as many shares. I haven't calculated my yield on purchase cost for the full holding, and for various reasons am not going to do so anytime soon, but I am certain that it's a lot closer to its current historical yield of 4.98% - probably somewhere in the 6-10% range.

At the opposite extreme, I've only added Reckitt Benckiser and Admiral to my HYP in the last six months, so their yields on purchase cost and current yields haven't had very much opportunity at all to deviate from each other.

If you want a measure of how much opportunity you've given your holdings to grow their yields on purchase cost above their current yields, I'd suggest average days held. To calculate it, start 'number of shares held' and 'share-days held' counts at 0 on your initial purchase date and go through your trades and corporate actions in the share in oldest-to-most-recent date order, processing each of them as follows:

1) Always start by adding the number of shares before the trade / corporate action times the number of days since the last trade / corporate action to the 'share-days held' count. (For your initial buy, this tells you to add 0 times a non-existent number of days - treat it as an instruction to add 0.)

2a) For a buy, just add the number of shares bought to your number of shares, leaving the 'share-days held' count unchanged.

2b) For a sell, subtract the number of shares sold from your number of shares, and multiply your 'share-days held' count by (new number of shares)/(old number of shares).

2c) For a share split or consolidation, change your number of shares to the number of shares you're left with, and multiply your 'share-days held' count by (new number of shares)/(old number of shares).

2d) To deal with a rights issue, you need four items of data about how it has affected your holding: the number N of shares you held when they went ex-rights (which happened between two trading days), the share price P at the close of the first of those trading days, the number R of rights you get at the start of the second of those trading days, and the subscription price S of the rights. Multiply both your number of shares and your 'share-days held' count by (NP+RP)/(NP+RS), then compare the resulting number of shares with the actual number of shares you end up with at the end of the rights issue. If the actual number is more than the calculated number, then use 2a) above to make a further adjustment as though you'd bought the difference; if it's less than the calculated number, then use 2b) above to make a further adjustment as though you'd sold the difference.

After you've processed all trades and corporate actions in that way, the result of dividing the 'share-days held' count by the number of shares still held is a reasonable 'average days held' figure for the shares you still hold.

Note by the way that I'm not saying that a high 'average days held' held figure necessarily implies that a share has a high yield on purchase cost. Rather, it means that you've given the share plenty of opportunity to build up a high yield on purchase cost... Not all shares make good use of that opportunity!

(*) This was not a "HYP" purchase as such - the term wasn't even invented until over a decade later! But as my share investment strategy (if you can call it that!) at the time was to buy shares in various privatisations and a few other flotations, stick the certificates in the bottom drawer of my desk, bank dividend cheques when they arrived, and otherwise forget about them, I thought it entirely suitable to 'adopt' the SSE certificate into my HYP shortly after I settled on HYP as one of my strategies in early 2003. A few of the other 'bottom drawer' certificates were also in companies that were HYP-worthy at the time, such as BT, and I treated them similarly.

Gengulphus

[minerjoe]

as a note - I have held BHP and RIO since 2015 - not too shabby a return

[88V8]

The post on Admiral got my thinking about my current yields on initial investments i.e. based on how much I have paid in cash how much am I now getting back in yield.

Interesting metric. To total how much that initial investment has made. Not seen that before.
Perhaps not readily useful, but a nice historic record.

Reason it's not necessarily useful is that as Gen says, the longer one holds a share the more time is has to generate income.
So one could have a share that was good a few years ago, produced oodles of income and grew its SP but is nowadays a dud, and by that measure it would look good compared to a well-performing but more recent acquisition.

It's rather like that sometimes seen metric, Yield on Cost. Interesting but no guide as to current merit.

However, if I were comparing my HYP's historic accrual with, say, the product of a cash account over the same period, then it could certainly be useful as an illustrator of the relative merit or otherwise of my HYP.

V8

[MDW1954]

I am a fan of bought-cost yield. But there's no denying that it's unpopular on this board -- or rather, its predecessor on TMF, where I faced criticism when I mentioned it.

Granted (as Gengulphus implied), it does need interpretation if it is to be regarded as actionable.

Granted, too, it's a fairly self-congratulatory metric.

But I find that it is a useful counter to the urge to top-slice etc, as some practice on this board. (Not saying that top-slicing is wrong, of course -- just that I don't do it.)

MDW1954

[Itsallaguess]

I am a fan of bought-cost yield. But there's no denying that it's unpopular on this board -- or rather, its predecessor on TMF, where I faced criticism when I mentioned it.

Granted (as Gengulphus implied), it does need interpretation if it is to be regarded as actionable.

Granted, too, it's a fairly self-congratulatory metric.

But I find that it is a useful counter to the urge to top-slice etc, as some practice on this board. (Not saying that top-slicing is wrong, of course -- just that I don't do it.)

I've never liked it, and I know that some of my better decisions with regards to re-allocation of income-seeking capital is highly likely to have been influenced by 'yield-on-cost' figures if I were to have taken notice of it over the years.

I gave a worked example as to why this can easily happen on an earlier thread discussing the subject -

https://www.lemonfool.co.uk/viewtopic.php?f=15&t=24073#p320934

We don't seem to discuss 'value strategies' much on this site (and clearly wouldn't in any depth on this board..), but one of the central planks to that approach is to sell investments if and when the underlying value was 'outed', which is to mean when a value-investment share-price rose to more appropriately represent it's underlying value, and for me, relatively high yield-on-cost figures on income-investments that currently deliver relatively low yields (as in the linked example given above) can sometimes be a good indicator that the 'value' has been outed on some income-investments too...

I think it's an 'interesting' metric that carries risk if it's focussed on too much by income-investors, and all I'd really add to the above is to suggest to income-investors that do like to use it or track it to make sure that they always have clear visibility of 'current or forecast yield' in the same areas of their spreadsheets to where this 'yield-on-cost' comfort-blanket figure might be lurking, just so they can be absolutely clear on just how well currently-allocated capital in working for them today, rather than looking through some sort of legacy looking-glass into the dark and distant past...

Cheers,

Itsallaguess

[Arborbridge]

Yield on cost is a nice comfort blanket.
It does no harm as long as you don't focus too much on it, as IAAG mentioned, and does look quite interesting - at least it appears to confirm that whole thing does work after all, despite some of our friends who say "Stock Market? - oooh no, wouldn't trust my pension pot to that lot. Give me a good solid 0.15% from a building society any day".

The more important factor for investment decisions, is what is happening right now with the yield.


Arb.

[Dod101]

As Arb tells us, it is the current (or trailling yield) that is what matters so that we can compare the current yield with what else is available in the market. The reaction to calculating yield on cost or minerjoe's slightly modified version is likely to be 'I did pretty well there' especially if the share has been held a long while, but that gets us nowhere unless you are going to compare it with what might have been available on a cash deposit. The share price is though dynamic and simply cannot be compared to a cash deposit and what would be the point?

Dod

[funduffer]

I also see initial investment yield as a backward looking metric.

However, I like to look at it as a broad comparison tool to other retirement income options.

With the rise of DC pensions, larger ISA allowances, tax free lump sums, and SIPP's as alternatives to traditional annuities and employer's pensions, there are now many options for providing an income to live on in retirement.

Once you decide that you are not going to sub-contract all or part your pension to your ex-employer, a pension provider or an annuity provider, but take control of it yourself, then you have choices to make. For example, you might keep your pot safe in a cash account and burn down the capital, or invest it in growth assets and sell down to get your income, or invest it in income generating assets. HYP is just one (pretty rare) example of the latter.

It really would be useful to understand how HYP performs in this broad universe of 'sub-contracted' and 'self-controlled' retirement income options.

I think this is the context of pyad's original HYP concept (self-controlled, one-off purchase, LTBH UK equity portfolio to generate retirement income).

Yield on initial investment is one way of measuring how well HYP does this against other options.

If HYP was more widespread, I am sure we would see how well it performs in this universe, and that would be very illuminating. Unfortunately, it is a niche scheme with very little data on how it performs against these alternatives.

FD

[minerjoe]

Yield on cost is a nice comfort blanket.
It does no harm as long as you don't focus too much on it, as IAAG mentioned, and does look quite interesting - at least it appears to confirm that whole thing does work after all, despite some of our friends who say "Stock Market? - oooh no, wouldn't trust my pension pot to that lot. Give me a good solid 0.15% from a building society any day".

The more important factor for investment decisions, is what is happening right now with the yield.


Arb.

As a note: checking BHP I worked out its the equivalent of a 14% interest rate YoY for 7 years - that gives you the same yield at this point. e.g. if I invest £100 at 14% when will I be getting a 26.9% return each year on my initial investment.

I'm not saying I'm making decisions based on this, and clearly BHP is having a wonderful time with the Iron Ore price, but its a nice metric. On the other hand DS Smith I bought in 2018 and they have performed pretty woefully in comparison. I paid for them, basically what they are worth now and they've given little in return to me - given how good the market for boxes has been...

[ADrunkenMarcus]

I am a fan of bought-cost yield.

Ditto - with the caveats.

Best wishes


Mark.

[tjh290633]

I also see initial investment yield as a backward looking metric.

I find that the yield when first bought is a useful parameter. Compared with current yield it is an indicator of steadiness or otherwise. If the current yield is much lower, then retention of the holding comes into question. But, of course, everything is relative. In isolation they may tell you nothing or a lot.

TJH

[Gengulphus]

... On the other hand DS Smith I bought in 2018 and they have performed pretty woefully in comparison. I paid for them, basically what they are worth now and they've given little in return to me - given how good the market for boxes has been...

Do you have actual figures about how good the market for cardboard boxes has been? Or is that just a "with the vast increase in home deliveries and at least the vast majority of them using cardboard boxes, the market for them must have been good" reaction?

The reason I ask is that I heard someone interviewed on the radio about this several months ago, and he said that yes, at the start of the pandemic the market for cardboard boxes for home deliveries had been good - but the market for cardboard boxes for industrial deliveries had fallen, and the combined effect was negative. I think the interviewee was from DS Smith, so his account might not have been fully objective - but it did seem quite plausible to me. Of course, I would expect the market for cardboard boxes for industrial deliveries to have recovered since, and the market for cardboard boxes for home deliveries to still be up, so the net effect by now ought to be positive - but it may well have taken several months to get to that position, the company may well have quite a few one-off Covid-related costs to recoup, and increased profitability can be expected to take some time to flow through into increased dividends.

And that account of their cardboard box business does seem consistent with various things they've reported - e.g. in their interim results, they said:

Overall corrugated box volumes in May were 4.7% below May 2019 but recovered to growth of 3% in October resulting in the half year being 1.0% down on the corresponding period last year.

and in their final results:

Organic corrugated box volumes have grown 3.5 per cent across the year, reflecting substantial growth from H1 (-1.0 per cent) into H2 (+8.2 per cent).

The net result is that I suspect their last financial year (which ended in April) appeared especially poor against the background of highly-visible rises in home deliveries, but that appearance may well be misleading because of much-less visible falls elsewhere. They do seem to be making much more positive noises about the current financial year, which shouldn't be misleading in the same way, and I'm going to give them the benefit of the doubt about that. But I'll definitely be looking at whether they continue to deserve that benefit of the doubt when their first-half results come out in December...

Gengulphus