# Letters of the Week

### Calculating yield

I do not understand the logic underlying Adam Carr’s analysis of the Commonwealth Bank of Australia yield. If a share is worth \$20 today, then that is the relevant figure for calculating yield, not the \$10 I may have paid to purchase it some time ago. The opportunity cost of holding the share is \$20 and if the dividend is \$1 then it is yielding 5%, not 10%. Surely date of purchase and historical cost are quite irrelevant to the exercise (putting aside possible capital gains tax issues).

B Bartley

Adam Carr’s response: Thanks for the comment. Just to clarify, I agree that dividend yield is of course measured by the current share price with, as you say, historical cost not being relevant. The dividend yield for the majors was listed in table two of my piece. The other references to ‘yield’ in the article are not dividend yields in the truest sense – instead, I was trying to give readers a sense of what the actual yield was on their initial investment, abstracting from capital gains.

### Dividend streams

I found Scott Francis’ article ‘A Steady Dividend Flow,’ January 21 very interesting. It prompted me to do some number crunching myself. The 2002-2003 dividend stream of \$10,000 would have required a portfolio of around \$220,000, producing a yield of 4.54%. By December 2012, the dividend stream of \$20,770 would represent a yield of 9.1% on the 2002-03 value of the portfolio. Also, by December 2012, the portfolio would have grown to around \$510,000, with \$20,770 representing a yield of 4.1%. The capital value of the portfolio increased over the 10-year period at approximately 9% per annum, while the dividend stream increased at approximately 7% per annum. There must be some minor differences between Scott’s and my simulation of the original portfolio, but either way it is a damn fine story. I just wish I had owned that portfolio back in 2002-03.

A Abbott

Scott Francis’ response: Thank you for the comment. It is very interesting to think that over that 10-year period, which includes the global financial crisis, the capital growth of the portfolio of shares might even be greater than the increase in dividends. Perhaps this is a function of the period of returns that were around 20%-a-year in the early stages of the portfolio. I did not do that calculation myself. It might be worth stepping through the process I used to calculate the dividends over time, and the portfolio.

I started by looking at the biggest 10 shares in the index in 2002-03. I chose these shares – BHP Billiton, the big banks, big retailers and the like – as they are the biggest in the market and therefore generally owned by the most people.

I then worked out, company by company, how many shares one would have to have owned to earn \$1,000 of dividends. For example, if a company was paying a \$1 dividend, then I would have to own 1,000 shares in that company to give me a \$1,000 dividend. I kept that number of shares constant for each future calculation.

I then looked at the period when dividends peaked prior to the global financial crisis, the 2007-08 financial year. For each company, I added the interim and final dividends, and multiplied by the number of shares owned in 2002-03.

Finally, I looked at the interim and final dividends over the 2012 calendar year, and again multiplied them by the number of shares owned in 2002. This was the result that really surprised me. My expectation was that dividends would be similar to their 2007-08 level, not that they had actually grown by a reasonable amount over that time.

### The politics of superannuation

Superannuation is such a hot topic on the political agenda, I think it would be worthwhile to outline the benefits and assistance that different groups, such as politicians, public servants, employees and the self-employed, receive. That way, we could focus on how each group is affected by changes to superannuation rather than the usual emotional debate that tends to ignore the hard facts.

J Church