Dividend Yield Theory

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Dividend Yield Theory

Post  Max on Thu Jul 01, 2010 9:58 pm

Scenario: I have a $10 stock paying a $1 annual dividend (10%). The stock price subsequently rises to $20. Am I still making a 10% yield?

Most of the dividend investors would say yes, but looking at it more closely, I say no.

I have a $10 capital gain whether it is sold or not sold, so to continue to hold the stock is to hold it at a 5% yield.

In this case, if I could buy a bond that yielded 8%, I am better off to sell my $20 stock and invest in the bond than to hold the stock even though it is still earning 10% on the initial $10 investment.

Conclusion: Cost is irrelevant in dividend yield. Market price is what determines the base of the yield equation. This causes me to doubt my set it and forget it strategy, since rising stock prices reduce my dividend yield to the point where I should consider selling them.

Max
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