Yield to cost basis is one of those concepts important to dividend investors, or at least it should be, because that's where your retirement income is going to come from. And although you have to be patient, it really adds up over time.
Here's an example, Procter & Gamble (NYSE:PG), a stock that hasn't exactly been on fire lately, but has rewarded investors quite nicely over the years.
* * *
Procter & Gamble & McDonald's: A 200%+ yield to original cost
If you'd purchased $10,000 worth of the stock back in 1982, three decades ago, and reinvested dividends, you'd have 8,964 shares of stock today. Each pays $2.25 per share, so your income would be more than $20,000 per year.
That means every single year, you're collecting twice what you originally put into the stock - a yield to cost basis of 200%+. Oh, and your shares are worth more than $500,000, which is an extra bonus.
But you don't have to go back 30 years to see decent returns. An investment just 20 years ago would have a yield to cost basis of 30%. An investment just 10 years ago would give you a yield to cost basis of 7.3%.
Here's a chart, scaled logarithmically, that shows the value of the stock and the yield to cost basis (NASDAQ:YCB) for the 10-year, 20-year, and 30-year investment.
Now you may not think that a 7.3% yield to cost basis sounds like much, nor impressed with merely doubling your investment over ten years, but consider that yield will only grow over time. A few dividend hikes of 10% or more and that 7.3% yield could turn into double digits quite rapidly.
Here's another example, McDonald's (NYSE:MCD).
In this case, an investment in MCD just ten years ago now delivers a 13.7% yield to original cost. And with a growing dividend, that yield will also be rising over time.
Now let me ask you a question: There's been a lot of talk that McDonald's is overvalued, or at least was overvalued when it was over $100 per share.
Forgetting for a moment that the stock's value quadrupled, would you sell a stock that was paying you more than 13.7% per year on what you originally put into it simply because it's pulled back?
I sure wouldn't - as long as I was reasonably confident that the dividends would keep rising over time. And they have. McDonald's has been raising its dividend each year for more than 35 years.
A conservative, but lucrative approach
You don't need to invest in high growth companies to see this long-term strategy pay off. Take a look at Consolidated Edison (NYSE:ED).
No, Con Ed did not perform as well as McDonald's or Procter & Gamble in portfolio value terms. But that yield to cost basis over the past ten years is over 10% with even higher yields if you'd invested 20 or 30 years ago. That's pretty respectable.
It takes a lot of patience, but when companies raise their dividends each year, you get a raise, a raise that's compounded as you continue to invest those dividends in the stock.
Altria: $10,000 to $2.8 million over 30 years
Perhaps the best chart I saw was that of Altria (NYSE:MO).
Investing $10,000 in this stock back in 1982 would be giving you an annual payment of $142,000 per year and your stock would be worth $2.8 million, but even that 27% yield to cost basis from an investment in 2002 is nothing to sneeze at.
Note: This stock had two spin offs, Kraft and Phillip Morris International. My chart assumes you put those spinoffs back into MO. (You might have done even better holding onto to both spinoffs, but the calculations got too complex for me to include)
The key to it all is to start early. This is, after all, a long-term strategy -- and to pick a diversified set of stocks that have a solid record of raising their payments even during recessionary periods, which actually helps because you get to pick up shares at lower prices.
Dividends aren't only to reward investors who buy a stock today. The real magic comes as you let those dividends compound over time. And all the stocks you pick don't have to be winners. Just some of them, or even just a few of them if you end up with an Altria.
And to those who say, sure but what's a $142,000 annual income going to buy me in 30 years? And what's $2.8 million really going to be worth in 2042? Well, it's sure a heck of a lot better than nothing.