Starhub

[CityFarmer]

What is obvious to me, might not be obvious after all.

Q: why it must be compared with current yield instead of cost ?
A: Because we need to compare apple to apple, rather than apple to orange. Current yield is the one used for alternatives, thus we need to use current yield for the comparison/evaluation, otherwise it will mislead

Q: Am I correct in my understanding?
Yes, if your investment decision is mainly base on dividend yield. FYI, if the "cost" is ex-accumulated dividends, than the "yield at cost" is much higher which might practically mean holding forever, because no other stock's current dividend yield will be higher.

I understand what opportunity cost is and I read investopedia definition. Choosing the investment that gives you a better outcome that the current one you have.

The part that I don't get is , why it must be compared with current yield instead of cost ?

Current Stock :

Yield on Cost = 10000 shares = S$18000 = 0.20/ 1.80 = 11 %

Yield at current cost = 10000 shares = S$40000 = 0.20 / 4 = 5 %

New stock with good fundamentals :

Yield at current cost = 10000 shares = S$40000 = 0.32 / 4= 8 %

Correct me if I am wrong, what you are saying is that I should sell my current stock as it is yielding 5% only based on current yield and buy the new stock that is going at 8% yield based on current cost.

Am I correct in my understanding?

[corydorus]

Just a reminder that this thread started on sustainability of the dividend yield of Starhub in context. So this needs to be taken into account on Dividend Yield investment decision.

[flinger]

I agree with you Specuvestor. No disagreements there.

^^ in the above example u are assuming the yield is constant into the future ie like a bond. If thats the case, ceteris paribus the choice is very clear. You would go for the "bond" with similar credit risk and yield pick up. Alas equity investment is far more complicated than using a spreadsheet

CityFarmer & Specuvestor,

I would appreciate if you can clarify for me why you this is a misleading statement for my better understanding and knowledge?

If I invested in Stock A : 10,000 shares at 1.80 per share. = S$18,000. ( exclude the broker free etc....)

If the stock went to 4.00 per share and I sold 5000 shares at 4.00. = S$20000. ( exclude the broker free etc....)

I recovered my invested capital of 18,000. I also now have 5000 shares which are in essence to me are "free".

On top of that, the dividends I earned so far and the dividends I still earn from the 5000 shares are all at no cost correct?

Appreciate if you can highlight to me where I might have a misunderstanding here?

Thank You for your help.

I am always skeptical on statement of "recouped all cost already, so it is FOC". It is a misleading statement for newbie, thus my post here.

Hi flinger

We actually had a similar discussion here on this thread whereby we discussed the difference between dividend income and capital income:
http://www.valuebuddies.com/thread-2641-...l#pid74618

Main thing is dividend income is in general a lesser risk income if the company has been paying CONSISTENTLY. An interesting case study would be Sheng Siong which is unlikely to have strong growth in next 2 years but pays good dividend for u to wait.

The other interesting and somewhat extreme case study is Starhub itself which I pointed out the 3 capital structure scenarios to ponder about. The wrench in the works is FCF profile of Starhub is deteriorating.

The reason why dividend income is less risk is because people tends to be too optimistic on capital gains without downside consideration as per this story:
http://www.valuebuddies.com/thread-5566-...l#pid91846

That is also the focus of Buffett which he constantly pose this question: would u buy a stock if the stock market was closed for the next few years? That already tells u that the focus is not on capital gains. Capital gain is a natural extension of a strong cash flow business. We need to identify the horse and the cart correctly.

Being a specuvestor i cannot say that i adhere to the principle wholeheartedly because it is a very boring exercise but i respect a certain forumer who has been sticking to this principle and i think he will go very far.

[flinger]

Hi CF,

I compare the yield based on the cash that came out of my finance to buy the stocks which a fixed sum.

The way, I look at it is , for the same amount of money can I get a better yield. ( All things been equal for both stocks.)

Why is that wrong? It is apple to apple . Cost to cost.

You are using the capital gain / loss that is forever moving up or down based on the stock market movement. The yield is forever moving based on the stock market gyration.

Apologies, it does not seem to obvious to me.... appreciate your reply to clarify my understanding.

What is obvious to me, might not be obvious after all.

Q: why it must be compared with current yield instead of cost ?
A: Because we need to compare apple to apple, rather than apple to orange. Current yield is the one used for alternatives, thus we need to use current yield for the comparison/evaluation, otherwise it will mislead

Q: Am I correct in my understanding?
Yes, if your investment decision is mainly base on dividend yield. FYI, if the "cost" is ex-accumulated dividends, than the "yield at cost" is much higher which might practically mean holding forever, because no other stock's current dividend yield will be higher.

[CityFarmer]

You are not wrong to say that "I compare the yield based on the cash that came out of my finance to buy the stocks which (is) a fixed sum",

but you has missed one important point. The current invested capital with capital gain, is also the cash that come out of your finance, if you sell it now.

I rest the case here, I am glad I am not a teacher.

Hi CF,

I compare the yield based on the cash that came out of my finance to buy the stocks which a fixed sum.

The way, I look at it is , for the same amount of money can I get a better yield. ( All things been equal for both stocks.)

Why is that wrong? It is apple to apple . Cost to cost.

You are using the capital gain / loss that is forever moving up or down based on the stock market movement. The yield is forever moving based on the stock market gyration.

Apologies, it does not seem to obvious to me.... appreciate your reply to clarify my understanding.

What is obvious to me, might not be obvious after all.

Q: why it must be compared with current yield instead of cost ?
A: Because we need to compare apple to apple, rather than apple to orange. Current yield is the one used for alternatives, thus we need to use current yield for the comparison/evaluation, otherwise it will mislead

Q: Am I correct in my understanding?
Yes, if your investment decision is mainly base on dividend yield. FYI, if the "cost" is ex-accumulated dividends, than the "yield at cost" is much higher which might practically mean holding forever, because no other stock's current dividend yield will be higher.

[flinger]

I get what you are saying about capital gain. But I guess I see it differently. Cash invested and capital gain are two different things for me and thus I don't combine them.

Anyway, thanx for your clarification.

You are not wrong to say that "I compare the yield based on the cash that came out of my finance to buy the stocks which (is) a fixed sum",

but you has missed one important point. The current invested capital with capital gain, is also the cash that come out of your finance, if you sell it now.

I rest the case here, I am glad I am not a teacher.

Hi CF,

I compare the yield based on the cash that came out of my finance to buy the stocks which a fixed sum.

The way, I look at it is , for the same amount of money can I get a better yield. ( All things been equal for both stocks.)

Why is that wrong? It is apple to apple . Cost to cost.

You are using the capital gain / loss that is forever moving up or down based on the stock market movement. The yield is forever moving based on the stock market gyration.

Apologies, it does not seem to obvious to me.... appreciate your reply to clarify my understanding.

What is obvious to me, might not be obvious after all.

Q: why it must be compared with current yield instead of cost ?
A: Because we need to compare apple to apple, rather than apple to orange. Current yield is the one used for alternatives, thus we need to use current yield for the comparison/evaluation, otherwise it will mislead

Q: Am I correct in my understanding?
Yes, if your investment decision is mainly base on dividend yield. FYI, if the "cost" is ex-accumulated dividends, than the "yield at cost" is much higher which might practically mean holding forever, because no other stock's current dividend yield will be higher.

[weijian]

I get what you are saying about capital gain. But I guess I see it differently. Cash invested and capital gain are two different things for me and thus I don't combine them.

In behavioral finance literature, the term used for this is mental accounting bias, ie. Assets have been assigned roles and been treated separately, when their common unit, $ is totally fungible.

Folks who suffer from this, tend to behave like this:
(1) No difference between own capital and capital gains (when Mr Market doesn't care about it)

(2) Cash from passive returns like windfall (lottery) or investments, can be more readily used for treats, than our 'hard earned' salary (when the $ is still yours anyways)

(3) I start a savings account to religiously save up for a holiday while still paying down credit card/student loans (yes, seeing progress as I work towards my holiday goal is more important than paying interest on the loan)

(4) All stocks in a portfolio, are reviewed separately. Losers are kept, winners are sold (so that the 'overall mental account' can be kept on positive ledger)

[Temperament]

For me once my cash is invested, it's total return for me. That is ROC+OR - plus dividends.

[flinger]

I think maybe you are over generalizing without understanding why I look at cash invested and capital gains as two different items.

There are many questions that you got to ask yourself in terms of your investing goal / portfolio / stock position / sell or buy decision / yield / risk profile / investing skill etc...etc..etc....

You need to look at your cash invested and capital gains differently. If you are trading then it definitely makes sense but investing is a different story.

But like I said, everyone has their own opinion and investing goals and as long as you reach where you want to go, thats all that matters. =)

I get what you are saying about capital gain. But I guess I see it differently. Cash invested and capital gain are two different things for me and thus I don't combine them.

In behavioral finance literature, the term used for this is mental accounting bias, ie. Assets have been assigned roles and been treated separately, when their common unit, $ is totally fungible.

Folks who suffer from this, tend to behave like this:
(1) No difference between own capital and capital gains (when Mr Market doesn't care about it)

(2) Cash from passive returns like windfall (lottery) or investments, can be more readily used for treats, than our 'hard earned' salary (when the $ is still yours anyways)

(3) I start a savings account to religiously save up for a holiday while still paying down credit card/student loans (yes, seeing progress as I work towards my holiday goal is more important than paying interest on the loan)

(4) All stocks in a portfolio, are reviewed separately. Losers are kept, winners are sold (so that the 'overall mental account' can be kept on positive ledger)

[CityFarmer]

I would like to comment that we (weijian and I) respected your choice and interpretation/view. In fact, there was no reason for us to interfere. It doesn't matter to us.

What do matter to us, was the right concept we are educating here. This forum is to promote value investing and right concepts in investing. It matters to me, and likely the rest of the buddies here, including weijian

I think maybe you are over generalizing without understanding why I look at cash invested and capital gains as two different items.

There are many questions that you got to ask yourself in terms of your investing goal / portfolio / stock position / sell or buy decision / yield / risk profile / investing skill etc...etc..etc....

You need to look at your cash invested and capital gains differently. If you are trading then it definitely makes sense but investing is a different story.

But like I said, everyone has their own opinion and investing goals and as long as you reach where you want to go, thats all that matters. =)