Stock with the highest and safest yield?

[nomore4s]

but seriously, the current rate of return is more important than the relative rate of return on your entry price.

if i buy at $20 and recieve a 10%dividend($2). then shares price rises to $40 and my dividend is still $2 (but now only 5%). why should i continue to think about me entry price? surely i can sell and find another stock paying the 10%. my capital may be better elsewhere.

I'm not sure I follow this.

Why wouldn't you continue to work out the yield based on your entry price? Especially if the yeild is the reason you brought in the first place. Isn't it all about return on your invested capital?

If I'm earning a 10% d/e on my intial entry price why would I sell just because the SP has doubled? If anything that is more reason to continue to hold, I'm still receiving 10% pa return on my money and that isn't easy to beat. The only time I would look to sell is if the d/e is reduced significantly. Also if the d/e is raised you get an even better return on your money.

 

[cheeyeen]

I'm not sure I follow this.

Why wouldn't you continue to work out the yield based on your entry price? Especially if the yeild is the reason you brought in the first place. Isn't it all about return on your invested capital?

If I'm earning a 10% d/e on my intial entry price why would I sell just because the SP has doubled? If anything that is more reason to continue to hold, I'm still receiving 10% pa return on my money and that isn't easy to beat. The only time I would look to sell is if the d/e is reduced significantly. Also if the d/e is raised you get an even better return on your money.

I guess the main reason is to take up the oppurtunity that you see in the market (or better use of capital), especially for people with limited capital. If an investment is yielding 10% on my entry price, but the price has double and yield is now 5% at market. And there is another investment that yield 8-9%. I might want to switch to there. Of course there are many other factors that need to be considered in an investment. Like whether the div/dist growth, capital growth, tax on realisation of the investment etc.

 

[RamonR]

One holder of CCV is getting 6.3% and the other around 14%????

I am actually getting around 11%.

The 6.2% is what you would get if you bought at todays prices.

 

[prawn_86]

I guess the main reason is to take up the oppurtunity that you see in the market (or better use of capital), especially for people with limited capital. If an investment is yielding 10% on my entry price, but the price has double and yield is now 5% at market.

The yield is now 5% at market, but not for you. You are still getting 10%, its based on your initial purchase price. So you would need to see another opportunity with >10% return for it to be worthwhile.

Also divs generally increase as time goes on, meaning so does your % yield. CBA for example, if you bought them when they floated wya back when, your %pa return is now about 100% pa, just based on the div. IE - The orginal sp was $3 and now they pay $3pa in divs
**example only, figures could be wrong**

 

[RamonR]

The yield is now 5% at market, but not for you. You are still getting 10%, its based on your initial purchase price. So you would need to see another opportunity with >10% return for it to be worthwhile.

I think you have made a mistake here.
True he is getting 10% on initial price but if he sold he would get twice the initial money.
So any shares returning 5% would see him with the same amount of dividends.

 

[prawn_86]

I think you have made a mistake here.
True he is getting 10% on initial price but if he sold he would get twice the initial money.
So any shares returning 5% would see him with the same amount of dividends.

Yeh i see what your saying.

But buying another stock would expose him to more risk and possible capital losses, which is something he would also need to consider.

 

[cheeyeen]

The yield is now 5% at market, but not for you. You are still getting 10%, its based on your initial purchase price. So you would need to see another opportunity with >10% return for it to be worthwhile.

Assuming we are only talking about yield or return on investment (not talking about risk or all other variables), I invest 10,000 in a share that paying me 1K of dividend a year (hence 10% yield on div). The share price double and div hasn't changed. So now I have 20K worth of money generating 1K (so 5% yield). If I see another oppurtunity where I can get 8% yield, I sell my 20K worth of shares and invest in this new one for 8%, paying me 1.6K dividend per year. Even a 6% yield will give me 1.2K. We probably shouldn't use the entry price, rather should be based on the current situation.

 

[nathanblack]

isnt it the whole point that dividend yield is expressed as a percentage using the current price. this is to allow a comparison between stocks, obviously research is required into dividend stability and growth. earning could be increasing or decreasing due to individual circumstances.

 

[Bullock]

Thank you all for your replies.

The reason I asked the question was to generate some interesting talk.

There are plenty of examples in this market of stocks not trading on fundamentals, so it's always good to get a feel for how we are all thinking, seeing as this seems to be driving things more than anything else.

 

[nathanblack]

Thank you all for your replies.

The reason I asked the question was to generate some interesting talk.

There are plenty of examples in this market of stocks not trading on fundamentals, so it's always good to get a feel for how we are all thinking, seeing as this seems to be driving things more than anything else.

have you considered hybrid notes? most have face value $100(although may be trading at a discount) and pay above bank rate, some quite high. they are rated by S&P so you can get AAA if you want low risk.

 

[nomore4s]

Assuming we are only talking about yield or return on investment (not talking about risk or all other variables), I invest 10,000 in a share that paying me 1K of dividend a year (hence 10% yield on div). The share price double and div hasn't changed. So now I have 20K worth of money generating 1K (so 5% yield). If I see another oppurtunity where I can get 8% yield, I sell my 20K worth of shares and invest in this new one for 8%, paying me 1.6K dividend per year. Even a 6% yield will give me 1.2K. We probably shouldn't use the entry price, rather should be based on the current situation.

This will also trigger CGT on your profits. Something worth considering.

Another strategy could be to sell half the original purchase and invest in the new stock, this would also trigger CGT but obviously only half the amount. It would also give you the best of both worlds allowing your winner to run and being able to re-invest your winnings.

 

[prawn_86]

isnt it the whole point that dividend yield is expressed as a percentage using the current price. this is to allow a comparison between stocks, obviously research is required into dividend stability and growth. earning could be increasing or decreasing due to individual circumstances.

This is how its expressed, but not the yield that everyone is recieving. If you bought at a higher price it will lower, if you bought lower the yield will be higher.

The quoted div yield is only applicable if you buy at the current price, so useful for comparison of new purchases, but not if comparing a new purchase with an investment you already hold

 

[nomore4s]

Just to add another perspective to this thread. The idea of using d/e's to build a long term income stream.

As an example (all figures are rough).

If you brought $10,000 worth of CBA 15 years ago @ $9 you would have got about 1,111 shares.
You would have received about $24,300 in d/e's and would now be currently getting nearly $3,000 per year in d/e's. And as CBA's d/e's grow so does your return.

And this is without re-investing any of the d/e's, the return obviously would compound if you had re-invested the d/e's each year. And there is no transaction costs or CGT to worry about as well as receiving franking credits.

I have actually just started using a version of this strategy to build myself an income stream as part of my retirement plan.

 

[cheeyeen]

This will also trigger CGT on your profits. Something worth considering.

Another strategy could be to sell half the original purchase and invest in the new stock, this would also trigger CGT but obviously only half the amount. It would also give you the best of both worlds allowing your winner to run and being able to re-invest your winnings.

Yes, that is correct, and hence the last section of my original post (quote again below). I was just trying to provide a reason to the question about why would I want to calculate yield on a current position base on current market price rather than the entry price. I can have a share that I bought 10 years ago at $1, and trading at $30 and paying $1 dividend. Div yield is 100% if I use my entry price as the basis of calculation. That probably mean I would not ever switch to another investment even the management comes out to say that the company would not have any growth for the next 5 years. 100% yield is just not possible to find in the market.

I guess the main reason is to take up the oppurtunity that you see in the market (or better use of capital), especially for people with limited capital. If an investment is yielding 10% on my entry price, but the price has double and yield is now 5% at market. And there is another investment that yield 8-9%. I might want to switch to there. Of course there are many other factors that need to be considered in an investment. Like whether the div/dist growth, capital growth, tax on realisation of the investment etc.

 

[nathanblack]

Just to add another perspective to this thread. The idea of using d/e's to build a long term income stream.

As an example (all figures are rough).

If you brought $10,000 worth of CBA 15 years ago @ $9 you would have got about 1,111 shares.
You would have received about $24,300 in d/e's and would now be currently getting nearly $3,000 per year in d/e's. And as CBA's d/e's grow so does your return.

And this is without re-investing any of the d/e's, the return obviously would compound if you had re-invested the d/e's each year. And there is no transaction costs or CGT to worry about as well as receiving franking credits.

I have actually just started using a version of this strategy to build myself an income stream as part of my retirement plan.

holding a good performing stock long term certainly has its merits, capital growth, earnings growth and dividends. ive used that method a bit myself for a portion of my portfolio, and if you read up on income producing shares, the method of using entry price to calculate real return is used alot.

i hold BBI, a spec stock with the intention that if it survives it may pay a dividend about 100% of my entry price within a few years.

personally i see the merit in buying for dividend, and for holding long term. i just prefer not to equate my current earnings with a historical share price. i can sell my shares today at todays prices.

similar to the thread on "wash sales". what if you had some accumulated losses you want to cancel out. so you sell those CBA shares at todays price, realise your CGT(discounted for holding period) and offset it against you capital loss.

then you rebuy the CBA shares at exact price, a "wash". your share holdings are still same, your dividends are still same, but now your yield is less? no its same.

 

[nomore4s]

personally i see the merit in buying for dividend, and for holding long term. i just prefer not to equate my current earnings with a historical share price. i can sell my shares today at todays prices.

The idea of buying for a long term income stream is not to sell unless the d/e stability is threatened or the company looks like going broke. It is all about ROI.

similar to the thread on "wash sales". what if you had some accumulated losses you want to cancel out. so you sell those CBA shares at todays price, realise your CGT(discounted for holding period) and offset it against you capital loss.

then you rebuy the CBA shares at exact price, a "wash". your share holdings are still same, your dividends are still same, but now your yield is less? no its same.

Why would you do that? Why wouldn't you just continue to hold the CBA shares and use the capital losses when you need them? They carry over to the next FY. You are incurring transaction costs as well as wasting your capital lose tax benefit.

 

[Julia]

Assuming we are only talking about yield or return on investment (not talking about risk or all other variables), I invest 10,000 in a share that paying me 1K of dividend a year (hence 10% yield on div). The share price double and div hasn't changed. So now I have 20K worth of money generating 1K (so 5% yield). If I see another oppurtunity where I can get 8% yield, I sell my 20K worth of shares and invest in this new one for 8%, paying me 1.6K dividend per year. Even a 6% yield will give me 1.2K. We probably shouldn't use the entry price, rather should be based on the current situation.

In your above description you're selling a share which has doubled in price (you don't say whether it's still uptrending?) in order to invest in something which will provide higher yield not on your original investment but on its current price.

I understand your theory if you're purely chasing dividend yield, but how much importance do you place on capital growth?

Let's say your original stock is still trending strongly upwards but is only offering a current yield of 5%. Would you sell this (incurring the CGT) to put those funds into, say, a stock yielding 8% but which is trading sideways?

Just curious.

isnt it the whole point that dividend yield is expressed as a percentage using the current price. this is to allow a comparison between stocks, obviously research is required into dividend stability and growth. earning could be increasing or decreasing due to individual circumstances.

I'd have thought so.

 

[skc]

Why would you do that? Why wouldn't you just continue to hold the CBA shares and use the capital losses when you need them? They carry over to the next FY. You are incurring transaction costs as well as wasting your capital lose tax benefit.

Capital loss is worth more in the current year than future years, unless they are adjusted by inflation and/or interest rate. So bring them forward can have some benefits.

 

[nathanblack]

I have a simple question.

What stock is providing the highest and safest yield.

have you considered debt notes like tabcorp bonds, at 4.25 per cent above the 180-day bank bill rate, about 7.4%

or hybrid securities like CBA PERLS 3, they’re rated A+, 7–8% return
Seven Network (SEVPC), Santos (STOPB), Suncorp-Metway (SUNPB), all pretty safe and returning high %.

the downside with hybrids is a lack of capital growth. they have a $100 fave value, so thearetically shouldnt go above that. but some are trading at a discount so you could pick up a bit of gain



What I mean by safest is unlikely to fall or be cut and your capital outlay not disappear.

I guess Telstra would rate highly.The banks?
if you want to buy and hold i would recommend banks. they offer(historically) capital gain and growth in dividends.

telstra ? maybe for dividend only, but i cant see them growing SP or earnings much in the short/medium term. they can only cut costs to increase profit. stable business but not a growth one.

how would you feel if your $10k telstra shares today, were worth $12k in 10 years and still earning only 7% ? can they outstrip inflation enough to grow you income? i dont think so. but i guess your capital is fairly safe(less downside risk)

Any thoughts?

income only i would look into hybrids. but if your looking long term perhaps look for a lower income with some capital gain included, like the banks.

 

[skc]

In your above description you're selling a share which has doubled in price (you don't say whether it's still uptrending?) in order to invest in something which will provide higher yield not on your original investment but on its current price.

I understand your theory if you're purely chasing dividend yield, but how much importance do you place on capital growth?

Let's say your original stock is still trending strongly upwards but is only offering a current yield of 5%. Would you sell this (incurring the CGT) to put those funds into, say, a stock yielding 8% but which is trading sideways?

Just curious.

To me the theory makes perfect sense for all other things being equal. So if one is trending strongly and the other going sideways, they are obviously not equal. But if the prospect of dividend stability (i.e. downside AND upside) is the same between the 2 stocks, then switching makes sense despite the current trend.

With the high CGT in Australia however, the differential in yield must be pretty significant though.