What You'll Learn in This Episode
Have you ever passed up on a great dividend-paying company because its current yield looked too low? Maybe it was sitting at 1 or 2 percent, so you moved on to chase something higher.
Well, what if I told you that a tiny 2% yield today could turn into a massive 10% or even 20% personal yield down the road?
Today, we’re discussing one of the most interesting metrics in dividend investing: Yield on Cost.
Complete Transcript
Speaker 1 (00:00):
Have you ever passed up on a great dividend paying company because its current yield looked too low? Maybe it was sitting at 1% or 2%, so you moved on to chase something higher? Well, what if I told you that a tiny 1% or 2% yield today could turn into a massive 10% or even 20% personal yield down the road? I’m Kanwal Sarai and welcome to the Simply Investing Dividend podcast. Today we’re discussing one of the most interesting metrics in dividend investing, yield on cost. Let’s get started. In this episode, we’re going to cover the following four topics. We’re going to start off with a quick review of dividends and the current dividend yield. Then we’ll talk about what is the dividend yield on cost. Then we’ll take a look at yield on cost versus current dividend yield. And then we’ll take a look at looking at some tips on how to maximize your future yield on cost.
(01:17):
Let’s get started with our topic number one, a quick review of what are dividends and current dividend yield. If we take a look at a company like Coca-Cola today, you can see that they have a little over 4.3 billion shares out there. If you were to buy all of the shares in the company or all of the stock in the company, you would own the entire company. Now, if you only bought a few shares in the company, you are still considered part owner of the company. And as part owner of the company, you are entitled to share in the profits of the company. And we refer to those profits or share of those profits as dividends. The company is going to pay you dividends for owning shares in that company. So let’s take a look at an example. If we have a company that is paying a dividend of $1 per share and you own a thousand shares in this company, well then you’re going to receive $1,000 every year for as long as you own those shares and as long as the company continues to pay the dividend of $1 per share.
(02:35):
Now that money gets deposited directly into your trading account and so you can spend that money if you wish or you can reinvest it. That’s what we like to do as dividend investors is we like to take those dividends, that cash that’s coming in from those dividends and reinvest it into other companies that are also going to pay us dividends. Now let’s take a look at what is the current dividend yield. So the formula is really simple. You can see it up on the screen here. It is simply the current annual dividend that the company is paying divided by the current share price. So in this example, we’ll take a look at a company that has an annual dividend of $1 per share and the share price today happens to be $20. So we simply take one divided by 20 and we express that as a percentage.
(03:32):
And you can see that in this example, it’s 5%. So what does that 5% really mean? So a quick way to figure that out is let’s say you wanted to invest $20,000 in this company. And again, you can see it up on the screen. The share price today happens to be $20 a share. So if you wanted to invest $20,000 in this company, you’d be able to buy 1,000 shares. And we know again on the screen, dividend is $1 per share. So we take a thousand shares, multiply that by $1, and you will earn $1,000 every year in dividends. Again, as long as this company continues to pay the dividend, and in this example, assuming you bought the shares when they were priced at $20 a share. So you’re going to earn $1,000 every year for as long as you own those shares. Now a faster way to look at it, and it’s the same example, you’ve got $20,000 to invest in this company and we already know that the dividend yield for this company is 5%.
(04:39):
So what is 5% of $20,000? And you can see that it’s $1,000. So we end up with the exact same number we had before. You are going to earn, in this example, $1,000 each year in dividends for as long as you own those shares and as long as the company continues to pay the dividend. So the dividend yield is the return on your investment while you hold onto your shares, because after you’ve bought them, the share price can go up or the share price can go down. It doesn’t matter. The dividend yield for you in this example would be 5% return on your investment every year in dividends, which is in the form of cash that gets deposited directly into your trading account. So of course, all things being equal, would you rather make 1% dividend yield or would you rather make a 5% dividend yield?
(05:39):
So of course 5% is going to be better. You’re making a better, higher return on your investment. So where do you find the current dividend yield? Well, the good news is it’s very easy to find and you don’t need to calculate it. You don’t need to look at the annual dividend and then divide it by the share price. That number is readily available on any website where you can look at stock prices or stock quotes. So let’s take a look at an example here up on the screen from Yahoo Finance and here we’re looking at Coca-Cola. So at the time of this recording, you can see the stock price and there’s some other information there, but we’re focused on the current dividend yield. And you can see right here in this example, it’s 2.21%. I’ll give you one more example. So if we’re looking at MSN money, same thing.
(06:31):
In this example on the screen, we’re looking at Bank of America and you can see that the dividend yield is right here on the screen. It’s 2.53%. So it’s readily available. You can easily compare the dividend yield from one stock to the next, and you don’t need to calculate this yourself. So now let’s move on to figuring out what is the dividend yield on cost. So what does that formula look like and how do you figure that out? So the formula is going to be very similar to the one that we just looked at. So you can see it up on the screen here, the formula for current dividend yield. Like I said before, it’s your annual dividends divided by the current share price. The dividend yield on cost is going to be the same annual dividend, but now you’re going to divide it by your purchase price of when you bought those shares.
(07:29):
So let me give you an example, a real world example here with Enbridge, and we’re going to show you how to figure out the yield on cost. So we’re going to go back 15 years. So 2011, you can see up on the screen here, the dividend back then, the company was paying an annual dividend of 98 cents a share, and the share price back then was $28. So if we take the dividend, divide it by the share price, express it as a percentage, you can see that the dividend yield back then was 3.5%. So if you bought the shares back then, that would’ve been your dividend yield or your current dividend yield at that time.
(08:13):
Now we fast forward to now in 2026, we can see the dividend has gone up quite a bit and the company is now paying a dividend of $3.88 a share. And the share price has gone up as well and it’s now $68. And so you can see that the current dividend yield today at the time of this recording is now actually 5.7%. Now let’s take a look at this. We’re going to stick with the same example with Enbridge and let’s assume that back in 2011, you bought some shares in this company. And remember I told you that the share price back then was $28 a share. So what would be your dividend yield on cost today? So let’s take a look. You can see up on the screen here, we’ve gone back 15 years. So every year you can see what the company was paying as an annual dividend.
(09:13):
So back in 2011, it was 98 cents. The following year, the dividend went up to $1.13, and then it’s gone up every single year since then. So you can see all the numbers up on the screen here. And now remember in this example, you purchased shares in Enbridge back in 2011 when the stock price was $28 a share. So your purchase price does not change over the last 15 years, right? You bought the shares at $28, and in this example, you held onto them until today. So you’ve held onto them for 15 years. So your purchase price does not change. And you can see that on the screen. And now you can see that we can easily calculate the yield on cost. Remember the formula is your annual dividend divided by your purchase price. So back in 2011, that year you would’ve made 3.5% return on your investment in Enbridge.
(10:15):
The following year, because the dividend went up, you can see if the yield on cost was 4%. And then the year after that went up to four and a half percent because again, the dividend went up and we’re going to fast forward all the way to 2026. And so if you bought shares in Enbridge back 15 years ago, today your dividend yield on cost would be almost 14%. And you can see it on the screen here. It’s 13.9% to be exact. And that is a great rate of return. You cannot get that rate of return today in a term deposit or in a GIC or in a bond or in a CD. That is a great return, if almost 14% return each year on your investment. And hopefully next year the company’s going to increase its dividends and then the yield on cost based on your purchase price is going to go up again.
(11:15):
And so that is double digit returns. That’s fantastic. And how do we know that the dividend could go up next year? I mean, we don’t know for sure 100%, but we have a high degree of confidence that the dividend next year should go up as well. And how do we know that? Because this company, and we’re looking at Enbridge, has now had 30 years of consecutive dividend increases. Think about how many market crashes we’ve had in the last 30 years, how many recessions, market downturns we’ve had in the last 30 years, but yet this company has continued to not only pay a dividend to the shareholders, but also increase its dividend every single year for the last 30 years. So I’m going to give you one more quick example. This is my personal example with TC Energy. Back in 2000, I purchased 185 shares in TC Energy.
(12:13):
You can see the stock price back then was $13.40. And if we multiply that by 185 shares, you can see that my initial investment was $2,479 in this company. However, since I’ve owned the shares and I still own them, I’ve received over $10,600 in dividends alone. So that’s pretty good, gets even better. The share price today of course has gone up to $91. And so the total return today, if I was to sell the shares, including all of the dividends, would be over 1000% return on this one investment with TC Energy. Now, I’m not in any rush to sell any of the shares. It’s better to hold onto them for me for now. And the reason is because of this. Now, if we calculate my dividend yield on cost based on my purchase price, and so we can see the dividend today is $3.51. We divide that by my purchase price, express it as a percentage, and is now 26.2% return every year in dividends just for owning these shares.
(13:26):
I don’t have to sell the shares. I don’t have to buy any more shares. I continue to make over 26% return on my investment with TC Energy. And again, like I said before, this is a great return, much higher than what you would get in a term deposit in a CD or a GIC or even a bond. So this is a great way for dividend investors to grow their stream of dividend income every single year. Now keep in mind, if you were to buy the shares in TC Energy today, you would not earn 26% return on your investment. Today, the current dividend yield is 3.9%. And it’s the same thing with Enbridge. You’re not going to be making 13.9% return if you go out and buy shares today in Enbridge. Why? Because the stock price has gone up, the dividend has gone up as well.
(14:26):
And you can see on the screen here, the current dividend yield as of this recording for Enbridge is 5.7%. So then how do you go from 5.7% today to eventually double digit returns? And you can see here up on the screen, this is the reason why, because the dividend continues to grow over the long term. So what you want to focus on as a dividend investor is to take a look at the dividend growth. Now again, on the screen here, we’re looking at Enbridge. You can see the dividend was 98 cents 15 years ago. It’s gone up, it’s gone up every year. And in 2026, it’s now $3.88 a share. So the key here is to take a look at the dividend growth. And we do have all that information on over 6,000 companies in the US and in Canada in our simply investing platform.
(15:25):
You can see the screenshot here I’ve taken from Enbridge. And so we can see that the average dividend growth over the last 20 years for Enbridge has been 10.38%. So that’s pretty good growth and you can see that it has helped any investors in Enbridge over the last 15 years to now earn double digit returns just from the dividends alone. So it’s important to compare the dividend growth number to other stocks that you might be considering. So up on the screen here, just as an example, I’ve added three other companies. So we can see again, with Enbridge, it was over 10% average dividend growth over the last 20 years, whereas Maple Leaf Foods was 6.6, BCE was 6.35, and TFI International was 4.33. So all things considered equal, it would be better to invest in Enbridge versus the other three companies because Enbridge has a history of growing its dividend very well, quite rapidly.
(16:37):
They’re growing their dividend every year and every time they grow the dividend, that’s more money in your pocket. Now let’s move on to the next topic in our episode today, which is the yield on cost versus current dividend yield. So now we know the current dividend yield. We saw that with Enbridge. It’s the annual dividend divided by the current share price, so it’s 5.7%. We also looked at how to calculate yield on cost, which is the current annual dividend divided by your purchase price. And in this example, we went back 15 years and we saw that the yield on cost in this example was 13.9% versus the current yield of five and at 5.7%. So why does yield on cost matter? It keeps you focused on building the income stream rather than obsessing over daily stock market fluctuations. So if you just look at the current dividend yield, of course it’s going to change daily.
(17:45):
Every time the stock price changes, and nowadays, because of the internet, you can look at stock quotes, stock prices change every minute, every hour, they go up or down. And every time the current stock price changes, the current dividend yield is going to change. So rather than focusing on that, let’s focus on the average dividend growth over the last 20 years. What is the company’s history of paying dividends like we saw with Enbridge, 30 years of consecutive dividend increases. So if you focus on that, and I’ve said this before in previous episodes, as dividend investors, our focus is number one on the dividend income stream versus the stock price, right? So we want to make sure the income stream is reliable, it’s consistent, and it’s growing every year because ultimately that is what’s going to cover your living expenses and you don’t have to sell your shares in order to live off of your portfolio.
(18:48):
Now, there’s a warning here, don’t use the yield on cost to evaluate whether to buy more shares today. Always look at the current valuation, the current yield for any new capital, and remember to apply the 12 rules of simply investing before you invest in any new shares. Something else to also warn you about is don’t just look at the current dividend yield and chase high yielding stocks. It could be a dividend trap. There are companies today, and if you can look them up, where the current dividend yield is maybe 9%, 11, 12, 14% return, that’s the current dividend yield. I want to warn you here, that could be a dividend trap. And for more information on how to avoid dividend traps so you don’t get caught in them, I recommend going back and watching episode number 10 to learn more about dividend traps and how not to get stuck with any stock that is going to eventually cut its dividend.
(19:59):
So the important thing here is the compounding snowball effect of growing dividends. A rising yield on cost naturally fights inflation and acts as your personalized growing retirement fund without paying additional fees. So there’s a lot that I’ve said in this one sentence here. So let’s talk about this for a minute. We saw the example with Enbridge, right? It started off with a three and a half percent yield 15 years ago and the yield on cost kept going up every time the company increased its dividend. And today, somebody who bought shares back in 2011 in Enbridge, today would be earning 13.9% on their investment every year. Just with that alone, you’re going to be beating inflation. And we also saw that the average dividend growth over the last 20 years has been over 10% with Enbridge. So again, you’re beating inflation. You don’t need to worry about putting your money into a bond or a term deposit or a GIC just to keep up with inflation.
(21:06):
With dividend increases, you can beat inflation right there. And then the other thing I want to mention here about the additional fees is we’re referring to the MER, the management expense ratio, that you’re all going to pay if you own mutual funds, index funds, or ETFs. And so the benefit of our dividend approach and buying or investing in companies that pay dividends is that we don’t pay an annual management expense ratio. So we’re taking that off the table. That means more money in your pocket. So keep in mind everything we’ve talked about so far, when you’re looking at stocks, so now on the screen I’ve got five companies that I’ve just listed here. You can see Apple has a current dividend yield of 0.31%. Microsoft is 0.72. Visa is at 0.74. Johnson & Johnson is 1.9%. So a lot of people initially will look at that current dividend yield and realize and say to themselves, the dividend is too low.
(22:16):
The dividend yield is too low. I’m not going to be able to retire on 1% return or a 0.7% return. I’m not going to invest in these companies. What I’m suggesting to you is, of course, we’re going to look at the 12 rules in just a couple of minutes of simply investing, but also take a look at the average dividend growth over the last 20 years. If any of these companies, again, all things considered equal, if any of these companies have demonstrated a history of growing their dividend rapidly, then you could possibly in the next 10, 15, 20 years be earning double digit returns with some of these companies if they were to grow their dividend. So don’t let the small or tiny dividend yield scare you off right in the beginning. So just to wrap things up here, the current dividend yield tells you what the market pays today.
(23:15):
The yield on cost tells you how hard your past dollars are working for you right now. So in the example I gave you with TC Energy, I invested $2,479 back in 2000. Today, that money is now earning me 26% return every year in the form of dividends. Now let’s move on to our last topic here. How can you maximize your future yield on cost?
(23:49):
Patience and dividend growth matter more than chasing a high starting dividend yield. So I mentioned that before, watch out for dividend traps. Watch out for companies where the current dividend yield is double digits. That is highly unusual. There’s got to be some risk in there. I talk about in episode 10, so go watch that episode about dividend traps. So what’s more important here is your patience and the dividend growth that’s coming from the company itself. So if we look at this example again, the same table I showed you a few minutes ago for Enbridge, this takes time. You can see that the dividend went from 98 cents a share to $3.88 a share. That is a huge jump in the annual dividend, but it took 15 years to get there. So this takes time. So you have to have patience. With this approach, you can’t buy a dividend stock in six months and then sell it or hold it for a year and then sell it.
(24:59):
You want to hold it for a long time, especially if you want to start seeing double digit returns, it takes time to get there. Now the good news is the sooner you start, the better off you will be. So this is a much better, probably the biggest reason here to start investing when you’re young. And then all of those yields that are currently giving you 2%, 3% return will eventually with dividend increases, hopefully get to double digit returns. But this is going to require patience. And if you want to become a successful dividend investor, you have to have the patience.
(25:39):
Don’t just buy any stock that pays a dividend or grows its dividend. Why? There’s a couple of other things to look at. I’m going to talk about them right now. If you just look at the dividend and if you just look at the current dividend yield and invest all your money, you might be taking on additional risk that you haven’t thought about yet. And I’ll explain why. So our approach is to invest in quality dividend paying stocks when they are priced low. That’s how you’re going to maximize your future yield on cost. So how do you know any stock anywhere in the world, if it’s a quality stock and how do you know if it’s priced low today? That’s the big question. And so for that, I’ve created what I call the 12 rules of simply investing. These investing rules are designed to lower your risk, save you time, and help you earn more.
(26:35):
You can see them up on the screen here. We’ve got all the 12 rules here. The way this works is before you invest in any company, make sure it passes all of the 12 rules. If it fails even one rule, skip it, move on to something else, move on to a different company. So let’s take a look at this. Rule number one, do you understand how the company is making money? If you don’t, skip it, move on to something else. Rule number two, 20 years from now, will people still need its product and services? Rule number three, does the company have a low cost competitive advantage? Rule number four, is it recession proof? Rule number five, is the company profitable? And rule number six, and this is the one we focused on in today’s episode. Rule number six, does the company grow its dividend? If it doesn’t, skip it, move on to something else.
(27:29):
Rule number seven, can the company afford to pay the dividend? Rule number eight, is the debt less than 70%? Rule number nine, avoid any companies with recent dividend cuts. Rule number 10, does it buy back its own shares? Rule number 11, is the stock priced low? So here we’re looking at the PE ratio, we’re looking at the PB ratio, and we’re also comparing the current dividend yield to its average 20 year dividend yield. And rule number 12, keep your emotions out of investing. So to help you with all of this, we’ve created an all-in-one solution. We have the Simply Investing web application and our dividend course. The web application tracks over 6,000 companies in the US and in Canada every single day, and we apply the Simply Investing criteria to all of those stocks so you can quickly see which ones to avoid and which ones to focus on.
(28:27):
The Simply Investing course, it’s a self-paced course. We’ve got 10 modules. In module one, we cover the investing basics. In module two, we cover the 12 rules of simply investing in detail. Module three, you learn how to apply the 12 rules to any stock anywhere in the world. Module four, we show you how to use the Simply Investing web application. Module five, how to place your first stock order, and I take you through step-by-step on how to do that. Module six, building and tracking your portfolio. Module seven, when to sell, which is just as important as to when to buy. Module eight, how to reduce your fees and risk, especially if you own mutual funds, index funds and ETFs. Module nine, you get your action plan to get started right away. And module 10, I answer your most frequently asked questions. So you may want to write this down if you’re interested.
(29:21):
We have a coupon code save10, S-A-V-E-1-0. It’s going to save you 10% off of our monthly or annual subscription, and the coupon does not expire. Once you apply it, you’ll have it for life as long as you remain an active subscriber. And so you can save 10% off the all-in-one solution, which includes the investing course and access to our web application. If you enjoyed today’s episode, be sure to hit the subscribe button, hit the like button as well. And for more information, take a look at our website, simplyinvesting.com. Thanks for watching.
