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Strategies & Market Trends : Dividend investing for retirement -- Ignore unavailable to you. Want to Upgrade?

To: Debt Free who wrote (3555)	1/30/2010 6:35:51 PM
From: Kip S	Read Replies (2) \| Respond to of 34328

I believe you are absolutely correct Debt Free. "Yield on cost" is a measure that might make you feel good as your dividend rises over time, but it can easily lead to poor financial decisions. Say you bought a stock with a 4% yield 15 or 20 years ago. It is not inconceivable that your "yield on cost" could be 20%, 30%, or more. If the stock price rose more rapidly than the dividend during that period, your current yield would be lower, say 2%. By focusing on "yield on cost" instead of current yield, you would be a lot less likely to examine that current yield critically and take what may be a sensible step: Sell your winner and put the proceeds in another 4% stock. Even if you had to pay capital gains taxes, you would be far, far ahead.

To: Debt Free who wrote (3555)	1/30/2010 6:40:59 PM
From: chowder	Read Replies (1) \| Respond to of 34328

>>> The problem that I see is that that are ignoring what your value of the initial investment is. If there is the potential for a better return of that capital in the future that you may be blinded to that opportunity if you look at the yield based on your original cost and not what the current yield is. <<< Then there is also the potential for being wrong with that new investment. The new investment may stop increasing the dividend, or worse, cut it. That's a huge risk. Another scenario is you may see that potential 10 years from now and then sell your initial investment. Now you've got capital gains to worry about. Does that offset the potential of the new investment? I suppose if you are dealing strictly with a tax deferred account it won't matter. I'd just prefer to keep the old investment as long as it's meeting my objectives and add the new one too. The beauty of high quality, high yielding investments, is that you are taking the market timing out of investing. Since stocks run in cycles, an investment could have a poor performing year or two and then explode to the upside. If you traded out of an investment that had been doing well, but had slowed down some, for something you think will do better, and then the cycle turns around, you've lost holding the old investment unless you market time back into that one correctly as well. Perhaps one can re-balance the portfolio, to keep positions equally weighted, by adding new potential investments as opposed to selling one that had been doing well and offers a good yield on cost? That might take the market timing out of dividend investing and is a way to add new potential investments. There are a lot of stocks that pay a better yield than KO. However, I think KO continues to raise it's dividend and is not in danger of stopping said increases. I think having that certainty is worth giving up some yield elsewhere. The first dividend stock I purchased was PG. Again, it only yields 2.9% and almost everything else I own has a better yield. But PG is going to keep their dividend policy intact. That certainty is important to me. (Others may have different objectives.) So, I own KO and PG and then look to add others. I don't want to place myself in a position where I'm forced to sell one for the other. If at all possible, I'd rather never have to sell them. When the time comes to draw said income, I'd like it to be perpetual without the stress of having to find higher yields and maintain them. If a company stops increasing dividends or cuts them, then all bets are off. You do what you have to do.