Measuring the Value of Time in Your Investments

It’s inter­est­ing that for all the “get start­ed (sav­ing) ear­li­er” mes­sag­ing we hear from finan­cial com­pa­nies, there aren’t very many met­rics that incor­po­rate the val­ue of hav­ing start­ed ear­li­er.

Looking at an invest­ment, you might look at your annu­al growth or div­i­dend yield to under­stand your invest­ment at a moment in time. However, we know that a gen­er­al “start invest­ing so you have mon­ey in the future” isn’t so moti­vat­ing for many. These met­rics aren’t enough to get peo­ple start­ed. Or, maybe they can get some peo­ple start­ed, but not oth­ers.

What oth­er met­rics can we use to get peo­ple think­ing about the ben­e­fits of start­ing ear­ly?

I like ‘yield on cost’ for doing this (I call this Actual Yield in my book, because ‘yield on cost’ is just too unfriend­ly).

Yield

Companies that pay a div­i­dend, have a met­ric called yield. The per­cent­age return of the div­i­dend rel­a­tive to the cur­rent price of a share. So, a $1 annu­al div­i­dend on a stock that costs $50 is a 2% yield.

Actual Yield

Yield on cost’ looks at the div­i­dend yield, but instead of using the cur­rent price it uses your actu­al cost of the stock.

Let’s say you bought that stock at $50 pay­ing a 2% yield of $1/share. Let’s also say the stock dou­bled over 10 years and dou­bled its div­i­dend to con­tin­ue pay­ing a 2% return of $2/share.

A pro­cras­ti­na­tor would look at both moments in time and think — I’m earn­ing 2% on my mon­ey no mat­ter when I invest.

That’s because yield doesn’t account for the 10 years that you’ve already been stick­ing to your wealth build­ing plan. Yield doesn’t moti­vate you to stick with it over time.

Yield on cost’ presents a dif­fer­ent result. You bought the stock at $50/share and now you’re get­ting a $2 div­i­dend. That $2 div­i­dend is a 4% return on the cost of your invest­ment. That extra 2% (in this case) rep­re­sents your reward for stick­ing to your plan over time.

A Real World Example in Apple

I came across a Bloomberg arti­cle dis­cussing Berkshire Hathaway’s recent dis­clo­sure of a huge pur­chase of Apple shares. It’s such com­mon think­ing to won­der “if you had invest­ed $1,000 in [com­pa­ny X] 10 years ago, how much would you have?”

I believe we need to won­der what your ‘pay­check’ would have been!

In the arti­cle it says today’s val­ue of a $1,000 invest­ment back then would be worth $7,111. That looks like the $1,000 pur­chase would have been for about $39 shares since Apple’s price the day of the arti­cle was about $185. So, cost would have been about $25.65 (this is all an esti­mate any­ways, but close enough to make a point).

Well, with a $2.92 div­i­dend, your ‘yield on cost’ would be over 11%… the $1,000 you invest­ed 10 years ago would be earn­ing 11% today, in addi­tion to being worth over 7x more. Your pay­check would be almost $114 — which means in 10 years you’d more than have your whole orig­i­nal invest­ment back.

And, Apple is buy­ing back a lot of shares, which means that if they keep their over­all div­i­dend expense con­sis­tent they could still raise their div­i­dend about 11% a year. On top of that, they have about $50 bil­lion a year in free cash flow that they like to return to investors (using both buy­backs and div­i­dends).

This year’s Apple div­i­dend increase was 16% and there’s no rea­son to believe that lev­el of div­i­dend growth isn’t sus­tain­able.

Relating this to Retirement

I real­ly feel these sorts of met­rics are much more inter­est­ing than how much your bank account has grown. While $114 isn’t a lot, what if you had tak­en $100,000 and invest­ed for retire­ment, you’d then be get­ting $11,400 a year in div­i­dends… div­i­dends that can pos­si­bly increase 15% a year!

You can spend those div­i­dends (after putting away for tax­es) with­out touch­ing the prin­ci­ple. You can bud­get to that div­i­dend pay­check in a way that’s dif­fi­cult to do for a pile of mon­ey (with­out a lot of uncer­tain­ty). That’s an aware­ness about your mon­ey that’s eas­i­er to under­stand than try­ing to guess how to con­vert a pile of mon­ey into a retire­ment bud­get.

Please note: I reserve the right to delete comments that are offensive or off-topic.

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