# A two-minute formula every ‘dividend investor' must know

by , 02 April 2019

It's no secret that if you are investing for your retirement, you want to have income producing stocks in your portfolio.

And by income producing, we mean shares that pay consistently high dividends.

But looking at the dividend yield alone, may show x but it could mean y….

Instead I want to show you a far more RELIABLE way to calculate the real dividend yield, so that you can invest in the right shares that pay consistent dividends, year after year.

The best part?

It only takes two minutes of your time.

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An easy way to find the REAL yield on a share

It’s called yield-on-cost and it’s a great way to find the REAL yield on a share.

It’s also easy to use. All you need to do is simply divide a company’s current annual dividend by the price you paid for the stock. Then times it by 100 to get a percentage.

The formula looks like this:

Current Annualised Dividend ÷ Original Share Price x 100 = Yield-on-cost

This two-minute calculation reveals what your dividend yield is today based on the price you paid for your original investment - A more significant number than just checking a stock’s current yield.

If a company increases its dividend after you purchased shares, you will enjoy a higher rate of income return on your original investment – your yield on cost rises.

Dividend investors like to use the yield-on-cost of their holdings to see the power of consistent dividend growth.

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Here’s how it works using two JSE companies…

Let’s say three years ago, you bought property company Hyprop – typically a high yielding company. You would’ve paid around a R117 per share.

Its current annual dividend is 757c per share. So when you plug the two numbers into the formula, we can calculate Hyprop’s REAL yield, which works out to be 6.47%, compared its current dividend yield of 10.77%.  That’s at least a 4% difference.

Therefore, the share doesn’t look as attractive anymore with a real yield of +6% vs a +10% yield.

Now let’s switch it around and use a company who sits on a lower yield compared to Hyprop. For example, retail group Clicks sits on a dividend yield of 2.14%.

Using the same example as Hyprop...If you bought shares in Clicks three years ago, you would’ve paid around R98.63 a share. Its current annual dividend is 356c.

Using the yield-on-cost formula reveals Clicks’ REAL yield is 3.6% - Over 1% higher than its current dividend yield.

What you can learn from this formula is companies with high dividend yields aren’t necessarily the best investments to make. Just consider that over those three years, Hyprop’s total return (growth + dividends) is -22% compared with Clicks’ total return of 87.2%.

So if you hold a portfolio of income-generating shares, or hunting for the next dividend payer, looking at their current dividend yield isn’t good enough.

Using the yield-on-cost formula instead, will show the REAL yield you’ll receive from a share. Therefore, you can make a more informed decision on whether the share is attractive or not.

Just remember, a rising yield on cost results from a company growing its dividend. In addition to providing higher income in the future, companies that consistently increase their dividends tend to have strong performance track records.

See you next week,
Josh Benton,
Managing Editor, Real Wealth

P.S. Speaking of companies who consistently increase their dividends and have strong performance track records…I’ve just released a brand new report, Retire Rich with Dividends. Inside you’ll find six perpetual paycheque opportunities that will build a safe and steady stream of retirement income that never runs out.