Mr. Cheap

You’re right, we’d receive the capital gains at the end, but we could have received them at any time we wanted (simply by selling the stock). Ignoring taxation, say I bought $100 of a stock paying 4% (I just did, BMO) and say GICs pay 3.25% (which is the current 1 year rate at TD).

Now say at the end of next year BMO value went up to $125, and the dividend yield is still 4% (but for me its now a 5% personal yield).

Say interest rates have gone up to 4.25%, ignoring taxation am I better to buy a GIC with 4.25% interest or keep my 5% personal yield?

$125 x 4.25% = $5.31 – if I sell my stock and buy a GIC
$100 x 5% = $5 (which is the same as $125 x 4%) – if I keep my stock for another year

Clearly the GIC is the rational choice, even thought it offers a lower return then my “personal yield”. That’s why I think personal yield is a mistake when thinking about investments.

You’re right that we could get the capital gains every year, by selling and re-purchasing the stock (or mentally “resetting it” if we didn’t want to deal with transaction costs). This would then keep your personal yield the same as the dividend yield, which in my opinion is exactly the right way to look at the investment.

Of course, you MUST factor in transaction costs and taxation which would make the situation radically different then this super-simple example.

If you say that is wrong compare against the original value of our investment because we mix in fact to conceptually different things (dividends and capital gains) – and thus the increased “personal yield” is ilusory, then let’s see what’s happening at the end, when we’d sell the investment: wouldn’t we still receive all the capital gains? If they were “mixed” with the dividends, why didn’t we get them for real, each time a dividend has been distributed? In this light, we can say that at the end we receive both capital gains and the dividends were at an increased rate.

I’d say it’s the same (real) phenomenon when you buy closed-end funds at a big discount. The annual rate of return and the periodic distributions from that fund will get magnified.

So, IMHO, the “personal dividend yield” is not a fallacy.

You made an interesting point, I never thought about the dividends this way.

Thank you!