No. of Recommendations: 4
I'm always willing to learn. Can you share your math/reasoning? What is being "double counted?"
I wouldn't call it double counting, just incorrect math.
First, realize that stocks do NOT pay a yield. Rather, stocks pay a dividend. We do a calculation to normalize the numbers so we can compare different stocks, which we call "yield".
Here is how yield is defined:
"You can calculate yield using a simple formula: take whatever form of yield you have (dividends, coupons, or net rental income) and divide it by the investment’s value.
...
To calculate the yield on your stock investment, use the following formula:
Dividends per share / stock price x 100"
Notice it says "stock price", not "basis".
What you paid is not in the calculation. It's the current price.
The purchse price figures in the calculation of capital gain, not in the yield.
Ex: I bought XYZ in my IRA 10 years ago for $10/share. I bought XYZ yesterday in my Roth for $50/share. XYZ pays $1.00 annual dividend.
Am I getting different yields? No. The yield of XYZ is the same no matter which account it is in.
Here's something from a post on the old TMF board from 1999:
"Consider this scenario, which when I first read it I came to realize that yield-on-cost was meaningless.
Five years ago you bought the stock at 10, and today it is 40. The current dividend is $2.
Therefore the current yield is 5% and your yield-on-cost is 20%.
But your wife comes to you and says that last month she was logged into the brokerage account and accidently hit SELL and sold all the shares at, say, 50. She immediately realized what happened and so she immediately re-bought it luckily at the exact same price it got sold at. Whew!! (Let's say this was an IRA account so we can ignore any capital gain/loss issue.)
So you think your stock's purchase price was 10, but in reality the purchase price of the shares was 50.
Q: What is your yield-on-cost? It is figured on the 10 that you thought? Or is it figured on the 50 that is the fact but which you didn't realize up until this very minute? BTW, she was so fast on the re-purchase that it happened within a fraction of a second after the sell."
Here is why it is important to get it right, taken right out of a thread on seekingalpha. (The actual post had figures that were even more extreme.)
You hav 100 shares of a stock you bought for $10 and is now $20. It pays $0.50 annual dividend. The current yield is 0.5/20 = 2.5%.
You calculate the yield based on your cost and get 0.5/10 = 5.0%
You find that ABC is a similar stock which is also $20/sh and pays $0.60 dividend.
Should you sell XYZ and buy ABC?
You say "Heck no! I am getting 5% and ABC only pays 3.0%"
But you are not actually getting 5%.
The choices are $2000 of a stock paying you $50/yr (XYZ) or $2000 of a stock paying you $60/yr (ABC).
(The actual post had figures that were even more extreme. His figures were a yield-on-cost of around 15%, and current yield about 3.5%)
