## Tuesday, January 10, 2017

### Yield and Cost Coverage

In my review of Bank of Montreal (TSX-BMO, NYSE-BMO), I looked at what dividend yield or cost coverage you might have if this stock was purchases 5 to 30 years ago. In that post I talked about how well I did with the stock that I purchased for my Trading account.

My dividends since 1987 covered the cost of my stock in 1987 and in my subsequent purchases by 173%. However, according to the table below, stock bought some 30 years ago (in 1987) with a median price, the purchase price would be covered by 643%. However, investors do tend to buy a stock over a period of time rather than all at once.

Dividend growth stock can deliver great returns over the longer term. For this stock which I bought in 1983 some 34 years ago, I am making a dividend yield of 47.8% on my original purchase price of \$7.37. The following table shows that if you had bought this stock from 5 to 30 years ago before 2017 what your yield or cost of purchase price would be covered if you paid a median price for this stock.

Yield Cost Covered
Yield if held 5 yrs. 6.11% Cost covered if held 5 years 28.00%
Yield if held 10 yrs. 5.25% Cost covered if held 10 years 45.09%
Yield if held 15 yrs. 9.85% Cost covered if held 15 years 112.01%
Yield if held 20 yrs. 13.91% Cost covered if held 20 years 178.50%
Yield if held 25 yes 32.80% Cost covered if held 25 years 451.74%
Yield if held 30 yes 44.28% Cost covered if held 30 years 642.92%

In the above table the yield after 10 years is lower than the one after 5 years because some 10 years ago (2007) the stock hit a peak that was not again matched until 2013. If you had purchased the stock at the lowest in that year your current yield would be 5.79%. Better, but if you had waited until the following year (2008), your yield would 6.95% and in 2009, 8.84%. Some years are just not good years to buy particular stocks.

However, if this stock was bought at the current price \$97.81 with the dividend of \$3.52 with the continuing dividend increase at 4.35% (the increase for 2016), then in 5 to 30 years times the dividend yield would be as shown in the table below.

In this table if you buy the stock at a \$ 97.81 and held it for 5 years you would have a yield of 4.45%, an increase of 23.7%. If you hold the stock for 30 years, you would have a dividend yield of 12.91%, an increase of 258.7%. This is assuming at the growth in dividends is at 4.35% per year over these periods of time.

 Div. Yield 4.45% earning in 5 Years at IRR of 4.35% Div. Inc. 23.73% Div. Yield 5.51% earning in 10 Years at IRR of 4.35% Div. Inc. 53.08% Div. Yield 6.82% earning in 15 Years at IRR of 4.35% Div. Inc. 89.40% Div. Yield 8.43% earning in 20 Years at IRR of 4.35% Div. Inc. 134.34% Div. Yield 10.43% earning in 25 Years at IRR of 4.35% Div. Inc. 189.94% Div. Yield 12.91% earning in 30 Years at IRR of 4.35% Div. Inc. 258.73%

The combination of yield and dividend growth can really make a difference. In the above table with 4.35% dividend growth starting at 3.60%, in 30 years' time the yield on the original purchase price (that is \$97.81) would be 12.91%. If you had bought this stock 30 years ago, the yield on your original purchase price (that is at \$7.91 in 1987) your current yield on that \$7.91 purchase price would be 44.28%.

My purchase price in 1983 (including commission) was \$7.37 with a yield of \$6.65%. I am now earning \$3.52 on that \$7.37 cost which is a yield of 47.76%. For my original purchase I started at a higher yield (6.65% compared to current one of 3.60%) and my dividend growth was higher (5.95% compared to current one of 4.35%).