What Is Yield on Cost (YOC)?
Let me explain Yield on Cost, or YOC, directly to you. It's a way to measure dividend yield by taking a stock's current dividend and dividing it by the price you originally paid for that stock. For instance, if you bought a stock five years ago for $20 and it now pays $1.50 per share in dividends, your YOC comes out to 7.5%.
You need to keep in mind that YOC isn't the same as the current dividend yield. That one divides the dividend by the stock's current market price, not what you paid initially.
Key Takeaways
- YOC measures dividend yield based on the original price you paid for the investment.
- YOC can grow a lot over time if the company keeps increasing its dividends, so if you're a long-term investor, focusing on dividend growth is how you maximize YOC.
- When you use YOC, make sure you don't compare it to other stocks' current dividend yields—that's not a fair comparison.
Understanding Yield on Cost (YOC)
YOC tells you the dividend yield tied to the initial price you paid for an investment. That's why stocks that have increased their dividends over the years can give you really high YOCs, especially if you've held them for a long time. I've seen cases where long-term investors have stocks with current dividends higher than the original purchase price, leading to a YOC of 100% or more.
Remember, YOC uses that initial purchase price, so you have to track all your holding costs and any extra shares you've bought. Include all those in the cost part of the calculation, or your yield will look way too high and unrealistic.
When you're looking at dividend yields, don't mix things up. Just because one stock has a higher YOC than another's current yield doesn't mean it's better. The high YOC stock might actually have a lower current yield. In that case, you might be better off selling it and putting the money into something with a higher current yield.
Important Considerations
Let me point out something key: YOC helps you see the long-term advantages of stocks over bonds. Bonds give you fixed interest, but dividends can grow, so stocks have more potential over time.
Example of Yield on Cost (YOC)
Consider Emma, a retiree checking her pension investments. Her portfolio has a big stake in XYZ Corporation, bought 15 years ago at $10 per share. Back then, XYZ's current dividend yield was 5% with a $0.50 per share dividend.
Over those 15 years, XYZ raised its dividend by $0.20 each year, and now it's set to pay $3.50 per share. The stock price is up to $50, giving a YOC of 35%—that's $3.50 divided by the original $10. The current yield is 7%, which is $3.50 over $50.
Emma thinks XYZ is one of her best investments because of that high YOC. But she's surprised when her manager sells it and buys into ABC Industries, which has similar strength but an 8.50% current yield. She calls to ask why they'd trade a 35% yield for 8.50%.
The manager explains the mistake: You can't compare YOC to current yield like that. Instead, compare the current yields—7% for XYZ versus 8.50% for ABC. Switching might make sense for better yield now, but you also have to look at dividend growth potential if you want to build YOC over time.
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