There’s an ancient Chinese saying: The best time to plant a tree was 20 years ago. The second best time is now.
It may seem like stocks go nowhere for long periods at a time. But many companies can use those periods to continue growing their dividends for shareholders.
When that happens, buyers see the amount of cash they get rise every year. Over a long enough timeline, they could even see dividends rise to a point where they get more cash payouts every year than what they originally paid.
This secret is a simple math equation known as the “yield on cost.” It involves the current total cash payout divided by the original price paid.
It’s a yield I use to determine how my income stocks are really doing. A stock with a current yield under 3 percent may not sound that exciting. But knowing that I’ve held onto it for years and have a yield on cost nearing 10 percent per year makes a huge difference.
To find a better investment today, that’s the yield I’d be giving up. I’d have to start over again, most likely with far lower returns as a result. That’s why a dividend stock may look unattractive in one light, such as current yield, but may, in reality, be too valuable for you to sell.
When looked at through that lens, yield on cost may be one of the most important ways to look at a stock’s valuation. In the dividend growth space, it’s arguably the most important. It’s a simple enough equation, and one that anyone can calculate on their dividend holdings.
It also means if you buy now, and sit through the markets ups and downs over a period of decades, you’ll set yourself up to get dividends that could equal or even exceed what you originally paid. That’s the power of owning dividend growth stocks.