Yields and Appreciation

Posted on October 10, 2014 by Ben Connard

Five years ago, the yield of our typical Large Cap portfolio was 1.8%. As of September 30th, the yield was still 1.8%. This seems to suggest that the account is generating the same amount of income it was 5 years ago; however, the portfolio is actually generating almost twice as much. Two things have happened over the last five years. First, companies have increased their dividend payouts as they increasingly looked to return money to shareholders. Second, the principal value of the account has appreciated significantly. 

For example, five years ago Microsoft (MSFT) was paying $0.52 per share per year. Last month, it increased its dividend to an annual rate of $1.24. This dividend increase is in addition to the stock’s appreciation of 80%. So while MSFT’s yield has increased 35% from 2% to 2.7%, the annual income per share has increased almost 140%. If MSFT acted like a bond, in that the principal stayed roughly flat, the yield would have increased from 2% to 4.8%. It should be noted that it is impossible to buy a high-quality bond that yields anywhere near 4.8% in today’s fixed-income market.

MSFT is an extreme example, but the whole equity portfolio has experienced an increase in income. $1 million invested five years ago in our Large Cap portfolio would be worth just over $2 million today. This $2 million dollar-plus portfolio currently generates about $37,000 in annual income. From the original $1 million dollar base, the investor now receives a yield of about 3.7%, well above the current 10-year Treasury rate of 2.5%.

Over the last five years, our Large Cap portfolio has actually generated more income (about $142,000 from a $1 million initial investment) than if one had bought a 5-year Treasury bond five years ago (about $117,000 in income). The larger point is that while stock yields appear low, equity portfolios generate increasing cash flows to the investor over time.