Don't Let Yield On Cost Lull You Into Complacency: VF As Case In Point

|
 |  Includes: VFC, WMT
by: Bering Hill

Yield on cost is a great concept and certainly gives the investor a good feeling as it climbs from the yield at time of purchase to a higher and higher yield as the years pass. However, placing too much attention on Yield on Cost will cause you to miss opportunities in the market. There is a point when harvesting gains must be considered. By harvesting gains and reinvesting into other opportunistic stocks, your yield on cost as measured by your original investment increases dramatically.

I will look at VF Corporation (NYSE:VFC) which has had a considerable run-up this year. Assuming an original purchase date of January 2, 2009, the current yield on cost is 4.43%.

I have randomly selected Wal-Mart Stores, Inc. (NYSE:WMT) as a replacement for VFC effective on October 31, 2011.

Assume the following transactions for VFC:

Date

Shares

Price

$

Dividend

Yield

YOC

1/2/2009

BUY

100.00

56.87

5,687.00

0.59

4.15%

4.15%

3/6/2009

Dividends

101.24

47.65

5,746.00

0.59

4.95%

4.15%

6/5/2009

Dividends

102.25

58.76

5,805.73

0.59

4.02%

4.15%

9/3/2009

Dividends

103.13

68.82

5,866.06

0.59

3.43%

4.15%

12/4/2009

Dividends

103.98

72.60

5,927.94

0.60

3.31%

4.22%

3/5/2010

Dividends

104.78

78.78

5,990.33

0.60

3.05%

4.22%

6/4/2010

Dividends

105.62

74.43

6,053.20

0.60

3.22%

4.22%

9/8/2010

Dividends

106.46

75.09

6,116.57

0.60

3.20%

4.22%

12/8/2010

Dividends

107.25

85.38

6,183.64

0.63

2.95%

4.43%

3/9/2011

Dividends

107.94

97.65

6,251.21

0.63

2.58%

4.43%

6/8/2011

Dividends

108.68

91.77

6,319.21

0.63

2.75%

4.43%

9/7/2011

Dividends

109.27

116.27

6,387.68

0.63

2.17%

4.43%

10/31/2011

SELL

109.27

138.22

15,103.52

Click to enlarge

Note that the share price is increasing at a much faster pace than the dividend, resulting in a lower yield over time. However, as the quarterly dividend increases, the yield on cost continues to climb.

The sales proceeds of October 31, 2011 were immediately invested into WMT as follows:

Date

Shares

Price

$

Dividend

Yield

YOC

10/31/2011

BUY

266.28

56.72

15,103.52

0.37

2.61%

6.93%

Click to enlarge

The yield on cost has been calculated using the original $5,687.00 invested in VFC. To have purchased 266.28 shares for $5,687, the shares would have cost $21.36 each. Current annual dividends of $1.48 divided by a “cost” of $21.36 produces a YOC of 6.93%.

Many dividend aristocrats have been solid performers for decades and have achieved very high yields on cost. But some have had run-ups in price and then sagged for many months or years. The astute investor should pay close attention to overvaluation and recognize when an opportunity to harvest gains exists in order to leverage the yield on cost even higher.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The choice to use VFC and WMT was purely random. This article is for informational purposes only and is not a recommendation to buy or sell any of the stocks mentioned. Please carefully research your target stocks before buying or selling.