The 100% Yield Idea Makes No Sense

by: Roger Nusbaum

Seeking Alpha ran a post titled How To Construct A Portfolio That Yields 100% which was about yield on cost dividend investing. Using the example of having bought "ExxonMobil" (NYSE:XOM) in 1971 the author notes that the price back then was $2.30 split adjusted and that the current dividend is $2.28, making the yield for anyone who bought in 1971 almost 100%.

As a quick note, and not mentioned by the author, 1971 was long before Exxon merged with Mobil and back then I think it was Esso not Exxon but please correct me if I have that wrong.

The 100% dividend idea is something I have mentioned before, talking about what is now Altria (NYSE:MO) for anyone who bought in the 1980s. Some clients own MO.

That a dividend eventually exceeds the cost basis is certainly a positive and makes a good argument for long term investing but the idea of XOM now yielding 100% for the person who bought in 1971 seems like incorrect mental accounting. Someone who bought 1000 shares in 1971 at $2.30 (remember that is split adjusted) obviously invested $2300. Assuming no dividend reinvestment (I don't think that was an option in 1971) this person now has 1000 shares worth $87,240. The dividend paid on this position is $2,280 which works out to 2.61%. The amount available for withdrawal, without selling any shares is the $2,280.

From the perspective of the investor, hopefully both the price and the dividend continue to go up but if two years from now the position is worth $100,000 and the dividends go up to $2700 then the yield will be 2.7% not 117%.

Obviously every investor who even thinks about this at all will apply whatever thought process they want to this but the 100% yield idea makes no sense to me.

There were only four comments on the article and the tone surprised me. This seemed like a good candidate for a dividend war to break out but that was not the case. A couple of the comments expressed doubt about being able to build an entire portfolio of names that can last more than 40 years and grow their dividends that long.

That is a valid question but I would come at trying to address it in a different manner than what I think I was reading. Many times in the past I have mentioned hoping to hold every name in the portfolio forever. It would be great to be so correct with each name that it could be held forever, it would mean less trading, less commissions paid, fewer tax consequences and less work (work meaning time spent finding replacement holdings).

Long time readers will know that while I hope to hold every name forever, of course that is not how things work out and when something needs to be sold (or just reduced) I sell it. But it is possible to hold some names forever. We have 33 holdings under the hood of the RRGR fund that we subadvise and 11 of them have been client holdings since 2004 and a few more were added in 2005 and are still owned now. Eight years is not 40 but of the eleven it is not crazy to think that some of them are on their way to the dividend exceeding the cost and will be 40 year holds. But again if something changes I would not hesitate on selling any of them. RRGR is obviously a personal and client holding.