So one of my strategies is to buy stocks that I believe will have a YOC (Yield On Cost) of at least 10% after 10 years. See Mathematics tab if you want to know how to calculate this yourself.
For example: Let's take a purchase I initiated earlier this year of NSC. It's currently yielding 2.9%. It has a 5-Year DGR (Dividend Growth Rate) of 19.08%. If that continues then the 10 year YOC would be 16.63%, much higher than the 10% I look for. However, I don't count on them keeping it quite this high. The 3-year DGR is 10.98%. Using this I would get a 10-year YOC of 8.22%. I would expect the DGR to be somewhere between those numbers.
I also include a 10-year YOC calculation in a spreadsheet for evaluating stocks. I typically use the 5-year DGR unless I don't think it is representative.
ReplyDeleteAlthough I aim to buy stocks I think will have a 10% YOC after 10 years, I will settle for a lower YOC if other measures are favorable. (I will also avoid stocks with a projected 10% YOC if other measures are not favorable.) I think projected YOC is useful as one part of a multi-faceted approach to stock evaluation.
deedubs, I completely agree with you. You should definitely use many more measures in evaluating a company for purchase. I will mention some of my other approaches that I use later on. I do typically like to using the 5-year CAGR also for calculating the YOC after 10 years.
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