Among almost any academic investor that you could possibly meet, the notion of caring about yield-on-cost is quickly dismissed as fool’s play; the hallmark of an unsophisticated investor.
What is yield-on-cost, and why is it so quickly dismissed?
There are two types of yield on cost: dividend yield-on-cost, and earnings yield on cost. It’s a comparison between what a company’s business performance is doing for you right now and the amount of cash you had to set aside to make that investment happen.
I’ll use the most famous investment in North America–Warren Buffett’s purchase of 400,000,000 shares of Coca-Cola—as an example.
From 1988 through the early 1990s, Warren Buffett spent $1.3 billion gobbling up shares of America’s signature soft-drink company, Coca-Cola (and because of the size of Buffett’s investment, he was unable to reinvest the dividends into more shares of Coke even if he wanted to do so).
As we … Read the rest of this article!