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The Three Most Important Words Dividend Investors Need To Know

Imagine buying a share some 30 years ago on 28 March 1984 and then waking up today to realise that the company’s latest dividend check to you alone is equal to what you had paid for the investment. Sounds too good to be true?

Thing is, that’s a real experience that long-time investors in the fizzy drinks behemoth Coca-Cola (NYSE: KO) would have gotten.

Coca-Cola

Share Price: 28 March 1984

US$1.15

Dividend for 2013

US$1.12

Dividend yield-on-cost

97.5%

Source: S&P Capital IQ

And looking at the table above shows you three most important words that dividend investors have to know: yield-on-cost.

The yield-on-cost is a simple investment term – it simply means the dividend yield that you’ll have received on your initial cost price. That’s easy enough to grasp. But unfortunately, what might not come so easy for other investors is the realisation that buying and holding great companies with a penchant for growing their dividends (Coca-Cola’s one such company, given that it’s part of the Dividend Aristocrats in the USA, a list of companies that have grown their annual dividends for at least 25 consecutive years) can give some truly magnificent yields-on-cost over the long-term.

Given enough time, even seemingly tiny dividends can become a torrent of income; the conglomerate Jardine Matheson Holdings (SGX: J36) is a great example.

Shares of the company were worth US$6.10 apiece some 13 years ago on 28 March 2001. With a dividend of US$0.265 per share declared for 2000, that gave Jardine Matheson a decent historical yield of 4.3% back then. But as the company grew its dividends with almost each passing year since, the yield-on-cost for Jardine Matheson’s shares have rocketed.

Year

Jardine Matheson’s dividend

Yield-on-cost based on share price of US$6.10

2001

US$0.265

4.34%

2002

US$0.300

4.92%

2003

US$0.330

5.41%

2004

US$0.400

6.56%

2005

US$0.450

7.38%

2006

US$0.500

8.20%

2007

US$0.650

10.7%

2008

US$0.750

12.3%

2009

US$0.900

14.8%

2010

US$1.150

18.9%

2011

US$1.250

20.5%

2012

US$1.350

22.1%

2013

US$1.400

23.0%

Source: S&P Capital IQ

For sure, it might be a little tougher to find other Coke- or Jardine Matheson-like companies in our local market here in Singapore. But, there are more than a handful of shares that have shown the ability to either consistently grow or maintain their dividends over the past decade. Some of these include real estate outfit Hongkong Land Holdings (SGX: H78), and instant beverage manufacturer Super Group (SGX: S10).

10 years ago on 28 March 2004, Hongkong Land Holdings was worth some US$1.74 a share. With dividends that had grown to US$0.18 per share at a compounded annualised rate of 11.6% since 2003, shares of the company now carry a yield-on-cost of 11.2%.

In Super Group’s case, its shares were trading at S$0.485 a decade ago. By growing its dividends at a compounded annualised rate of 27.7% since 2003 to its current level of S$0.09 per share, the company’s shares have a yield-on-cost of some 18.6%.

Foolish Bottom Line

Currently, Jardine Matheson, Hongkong Land, and Super Group carry trailing dividend yields of 2.3%, 2.8%, and 2.5%, respectively, based on their latest share prices and dividends.

Those are not yields that would set pulses racing but here’s an interesting thought: If those shares are able to grow their dividends in the future in a manner akin to how they did in the past, investors might eventually be pleasantly surprised at their yields-on-cost many years down the road.

In any case, it’s important for dividend investors to appreciate the concept of a yield-on-cost, and how buying and holding great companies for the long-term is one great way to help build a solid income stream for the future.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing owns shares in Super Group.