My Financial Independence Journey » Investing » Achieving a 10% yield on cost in 10 years
Achieving a 10% yield on cost in 10 years
Many dividend growth investors consider how long it will take a given stock to reach a 10% yield on cost (YOC). The ideal target is for a 10% YOC to be achieved within 10 years. How quickly a stock reaches a 10% YOC is a function of the yield at the time of purchase and the dividend growth rate. Math, a table, and an example all follow!
In order to determine an estimate of what the YOC of your investment will be after 10 years, you need to calculate three things.
- The starting yield.
- The dividend growth rate (DGR).
- The YOC after 10 years.
If math annoys you, as it often annoys me, you can skip all these equations and just use the table below to look up the answer.
Calculating the starting yield
This one is pretty easy:
yield = starting dividend per share / how much you paid per share of the stock
Calculating the 5 year dividend growth rate
The dividend growth rate (DGR) for 5 years is calculated using the standard compound annual growth rate formula (CAGR).
DGR = ((current yearly dividend / dividend five years ago) ^ (1/4)) – 1
Calculating the YOC after 10 years
Now for the last bit of math. Once you have the starting yield and the DGR, you plug them into the below equation to get the YOC after 10 years.
YOC at 10 years = (1 + DGR)^10 * yield
Using the table to determine YOC 10 years later
If you aren’t a fan of math, you can simply use the table below to look up an estimate of what the YOC of your investment will be after 10 years. Simply pick the starting yield from the top row, and a dividend growth rate from the left hand side. The cell that is the intersection of your chosen row and column is what the YOC of your investment will be after 10 years. Cells shaded in green are all in the 10% or greater sweetspot.
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How are my investments doing?
I thought that this was a fun exercise ,so I decided to check out my dividend growth portfolio. First, I estimated the 5 year DGR using the CAGR formula above. I used my investment’s 2012 YOC for the starting yield. Then I was able to estimate what the YOC at 10 years would be. Results are listed in the table below.
Note: BP and PSX were not included in the table as they didn’t have enough data to reliably calculate a 5 year DGR.
As you can see from the table, after 10 years the predicted YOC’s of each stock range from PPL’s lowly 5.9% to LOW’s whopping 45.8%. The average of the YOCs was 11.7%. While I didn’t do any weighting, it looks like I’m doing pretty good at selecting stocks that, as a group, meet the 10% YOC by 10 years metric.
You might have noticed that LOW’s predicted YOC was really high. Sometimes stocks go through a period of rapidly increasing dividends only to have the growth rate slow down afterwards. This is likely where LOW’s is right now. This kind of growth can’t continue forever.
Because LOW had such a high predicted YOC, I decided to be a bit conservative in my estimations. So I took another average of the estimated 10 year YOCs, this time excluding LOW. I got 9.4%. Not too bad.
How reliable are these estimates?
They’re just estimates, so take them with a grain of salt. As they say in the investing world, past performance is not a gaurantee of future returns. Dividend growth may have been blazing fast over the last five years, but it might grind to halt during the next 10. The reverse is also true. Sometimes dividend growth slows down only to pick up several years later as business conditions and profits improve.
Don’t consider this metric to be the be-all and end-all of stock picking metrics. Consider it one more item in your armamentarium of analytic tools for picking great stocks.
Disclaimer: I’m long all the stocks mentioned or listed in this post. I’m also short INTC.
Readers: How does your portfolio stock up against the 10 by 10 metric? Do you even use it? If so, how much weight do you assign to it?
Written by myfijourney
41 Responses to "Achieving a 10% yield on cost in 10 years"
This is actually one of the metrics I look at when determining a stock for purchase. My main excel sheet calculates this by pulling info from David FIsh’s CCC sheets. My other requirement would be that the 3-year and 1-year CAGR’s haven’t dropped past the point that they wouldn’t provide a 10-year YOC of 10%.
Looking into both the 1 and 3 year CAGR’s is a pretty good idea. Thanks for the tip.
My problem with this metric is you miss companies that can grow the dividend faster than historically, buyback shares in the future, or other things that aren’t captured. I understand that this is a nice, easy, and fundamentals-based screen…but you miss great opportunities in companies that are in a period of change. SRE comes to mind. If you had seen that the future dividend would grow faster than historically (a few years ago) you could have made a lot of money.
Headed Home,
Thanks for stopping by. I agree with you entirely. YOC is just one metric that I use when sizing up a stock. Certainly not the only one. But YOC is a metric that is very popular in the dividend growth community, so I felt that it might be worth writing a post about, and trying to explain what it is and how it works.
Very interesting.I had not considered YOC before. I will look at my portfolio and see where we are, and use it as a metric when reviewing next purchases! Thanks.
There are big fans, and equally large detractors, of the YOC metric. I fall somewhere in the middle.
While I would be thrilled with a 10% YOC in 10 years, it isn’t really necessary for me. If I can get a stock with a 3-3.5% entry yield and a 9-10% dividend growth rate long-term, I’d be a very happy investor. Those numbers wouldn’t necessarily translate into a 10% YOC in 10 years, but fundamentally that’s what I look for in a long-term investment. You’re generally looking at high single digit to low double digit annual returns at that rate, and I’m a very happy camper indeed if I can compound gains like that over a long period of time.
More than anything I’m a simple investor just looking to exceed expenses by way of dividend payouts before 40 years old.
I like the spreadsheet. That’s a really cool exercise to take some of your favorite stocks and see how it stacks up against the “sweet spot”.
Best wishes!
I’m a sucker for fun with Excel projects. If you have any suggestions, I’ll try to take them on.
A 3-3.5% entry yield and a 10% annual growth rate is good by my standards as well.
I like the 10% YOC at 10 years because it’s simple. But it has to be taken in context with many other metrics (P/E, payout ratio, company news, etc.) when sizing up a stock.
I never used this metric before (didn’t even knew it existed). I just did this exercise (fun!) for the few stocks that we have, I have YOC ranging from 7-13%, nowhere near impressive as yours. Do you use this when evaluating a buy? I have been keeping it very simple (not because I feel that is enough, but I am just dipping my toe in the dividend investing) – only p/e, payout and technology that I understand.
Suba,
It’s one of the metrics that I use. Of course there’s plenty that it doesn’t capture. Just because a stock’s dividend is growing fast now doesn’t mean that it will grow that fast forever. Or just because a dividend is slow growing now doesn’t mean it will stay that way forever.
So I would definitely add it in, but I wouldn’t base my decisions solely on it.
Great stuff man. The only thing which frustrates me with all these calcs is pulling data for every stock I want to evaluate from somewhere. I tried to import HTML tables from yahoo and it works so many of my calculations can be fully automated, but sometimes even importing data from yahoo is pain to work with. Also i use google spreadsheets and with importing data I am now encountering formula limits.
I also wasn’t aware of this metric. I knew the YOC exists, and I always tried to buy stocks with as high yield and as high growth as possible and the rest is a matter of time, so why bother with calculation, right?
Martin,
The 10% YOC isn’t a necessary calculation. But it’s popular in the dividend growth investing world so I thought it would be good to write about it.
I also have the exact same problem with spreadsheets. There isn’t an easy way to get all the information that I need. I use the champions, contenders, and challengers lists, Google sheets, and Yahoo finance. I would love to get everything I wanted in one spot.
Interesting. I don’t actually use Yield on Cost for evaluating a prospective investment, but rather it happens to be more of a retrospective measure in evaluating the success of my investments. I think this is largely because I find it difficult to reliably estimate the growth out 5+ years. Like you mentioned, you have to take those estimates like Lowes with a grain of salt. Recent dividend growth, operating cash flow growth and my assessment of growth prospects for the business tend to be my main decision criterion.
The 10 year predicted yield on cost is a neat way of looking at the combination of starting yield and projected dividend growth. To that end, I have begun incorporating it into my analyses. But like any other metric, it only contributes a small amount to my overall decision.
I know YOC causes a bit of controversy between some DG investors. But as long as you take it for it is then I find it useful. I use it just to try and see where an investment might be 10 years down the line but it’s not a heavily weighted metric in my analyses. Still fun to keep track of to see how your picks are doing. I posted about this about a year ago and have since converted the post over to Google spreadsheets so you can input the metrics and it calculates either the 10 year YOC, starting yield given a certain DGR for a 10 year period or number of years to hit 10%.
Nice spreadsheet. Now if only I can find a 10% current yield growing 17.50% per year. That would be great.
JC,
I tend to enjoy excuses to make spreadsheets. I agree with you that the 10 year predicted YOC shouldn’t be heavily weighted. But I did think it was worth explaining, since it does come up in the world of dividend growth investing.
[...] a starting yield of 2.8% and a growth rate of over 20%, WAG will hit hit over 15% yield on cost (YOC) in 10 years. It’s unlikely that this growth rate will be sustained over the next 10 years, so if use a [...]
[...] a starting yield of 3.3% and a growth rate of about 13%, MCD’s yield on cost will grow to about 11% in 10 years. In order to double the dividend, using the rule of 72, it will take [...]
[...] a starting yield of 2.9% and a growth rate of about 7.5%, ADP’s yield on cost will grow to about 7-8% in 10 years. In order to double the dividend, using the rule of 72, it will take [...]
[...] a starting yield of 3.3% and a growth rate of about 15%, MSFT’s yield on cost will grow to about 13% in 10 years. In order to double the dividend, using the rule of 72, it will take [...]
[...] a starting yield of 4.4% and a growth rate of about 10%, COP’s yield on cost will grow to about 10.4% in 10 years. In order to double the dividend, using the rule of 72, it will take [...]
[...] a starting yield of 2.8% and a growth rate of about 9%, AFL’s yield on cost will grow to about 7% in 10 years. In order to double the dividend, using the rule of 72, it will take [...]
[...] a starting yield of 5.5% and a growth rate of about 20%, LO’s yield on cost (YOC) will grow to well over 30% in 10 years. Using a more conservative 10% growth rate, the YOC will be about [...]
[...] a starting yield of 3.3% and a growth rate of about 12%, APD’s yield on cost will grow to about 10% in 10 years. In order to double the dividend, using the rule of 72, it will take [...]
[...] a starting yield of 2.8% and a growth rate of about 9%, PG’s yield on cost will grow to about 7% in 10 years. In order to double the dividend, using the rule of 72, it will take [...]
[...] a starting yield of 2.4% and a growth rate of about 10%, PG’s yield on cost will grow to about 6.5% in 10 years. In order to double the dividend, using the rule of 72, it will take [...]
[...] a starting yield of 4.6% and a growth rate of about 2%, PPL’s yield on cost will grow to about 5.5% in 10 years. In order to double the dividend, using the rule of 72, it will take [...]
[...] a starting yield of 2.5% and a growth rate of about 20%, SWY’s yield on cost will grow to well in excess of 12.5% in 10 years. In order to double the dividend, using the rule of 72, it [...]
[...] a starting yield of 3.3% and a growth rate of about 10%, CVX’s yield on cost will grow to well in excess of 9% in 10 years. In order to double the dividend, using the rule of 72, it [...]
[...] a starting yield of 2.8 and a growth rate of about 20%, AMP’s yield on cost will grow to well in excess of 15% in 10 years (assuming it can keep up the current clip of dividend [...]
[...] a starting yield of 2.8 and a growth rate of about 17%, XOM’s yield on cost will grow to well in excess of 15% in 10 years (assuming it can keep up the current clip of dividend [...]
[...] a starting yield of 3.6% and a growth rate of about 20%, HAS’s yield on cost will grow to well in excess of 18% in 10 years (assuming it can keep up the current clip of dividend [...]
[...] a starting yield of 3.0% and a growth rate of about 10%, GIS’s yield on cost will grow to well in excess of 7.8% in 10 years (assuming it can keep up the current clip of dividend [...]
[...] a starting yield of 3.0% and a growth rate of about 8%, EMR’s yield on cost will grow to well in excess of 6.5% in 10 years. In order to double the dividend, using the rule of 72, it [...]
[...] a starting yield of 2.8% and a growth rate of about 8.5%, KO’s yield on cost will grow to well in excess of 6.8% in 10 years. In order to double the dividend, using the rule of 72, it [...]
I just take YOC as information where my payments will be in 10 or 20 years, but do not solely invest into stocks based on their future yield. However I have a great fun using YOC when arguing with some other investors over why investing into dividends is a sucker game, because you only get 3% while they can make 30% trading stocks or hit a home run. Many change their view when I tell them than in 10 years I can in some cases get 10 – 15% yield on my original yield every year and whether they can provide it consistently too.
I use YOC similarly. But it is interesting how many investors don’t seem to understand that dividends can and do grow over time. And in many cases they can grow quite substantially.
exactly, they do grow. And because the stock usually follow that growth you won’t see the dividend growth on the stock quote. That’s why many people still see the stock paying 3% (for example) per the quote, but that is no longer true if you look at it per your investment. When I bought JNJ a few years ago when it was selling for $57 a share, the yield was 3.6% back then. Since today the stock is selling around 88 a share the yield is 2.9% and one would say that the stock is a sucker, but my yield on $57 a share cost is no longer 3.6% but higher. They don’t see it.
[...] a starting yield of 2.8% and a growth rate of about 4.8%, TEVA’s yield on cost will grow to well in excess of 6.8% in 10 years. In order to double the dividend, using the rule of 72, it [...]
[...] a starting yield of 3.8% and a growth rate of about 3.2%, TRI’s yield on cost will grow to well in excess of 5.4% in 10 years. In order to double the dividend, using the rule of 72, it [...]
[…] a starting yield of 2.6% and a growth rate of about 10%, GPC’s yield on cost will grow to well in excess of 6.5% in 10 years. In order to double the dividend, using the rule of 72, it […]
[…] a starting yield of 3.3% and a growth rate of about 10%, CLX’s yield on cost will grow to well in excess of 8.0% in 10 years. In order to double the dividend, using the rule of 72, it […]