Key Takeaways
- Measures dividend yield based on original purchase price.
- Useful for tracking dividend growth over time.
- Differs from current yield which uses market price.
- Helps evaluate long-term dividend investment success.
What is Yield on Cost (YOC)?
Yield on Cost (YOC) is a financial metric that measures the annual dividend income you receive from an investment relative to the original price you paid for it, expressed as a percentage. Unlike current dividend yield, YOC focuses on your historical purchase price, offering insight into how your investment's income has grown over time.
This metric is especially valuable for dividend growth investors seeking to track the success of their long-term holdings and dividend increases. Understanding YOC can complement your knowledge of related concepts like compound annual growth rate (CAGR) and help you evaluate income growth strategies.
Key Characteristics
Yield on Cost offers a unique perspective on dividend income through several key features:
- Historical Perspective: Calculates dividend yield based on your original purchase price, not the current market price.
- Dividend Growth Tracking: Reflects increases in dividends over time, highlighting successful dividend growth investing.
- Simple Formula: YOC = (Annual Dividend ÷ Original Purchase Price) × 100, making it easy to compute.
- Investor-Centric: Tailored to your specific investment entry point, making it unique to each investor.
- Complementary Metric: Works well alongside tools like R-squared to assess stock performance consistency.
How It Works
To calculate YOC, divide the current annual dividend per share by the price you originally paid per share, then multiply by 100 to get a percentage. This straightforward calculation lets you see the effective yield based on your initial investment rather than fluctuating market prices.
For example, if you bought shares of a company at $40 each and now receive $2.40 annually in dividends, your YOC is 6% ($2.40 ÷ $40 × 100). This contrasts with the current dividend yield, which would consider the stock’s present market price, potentially offering a different perspective on income.
Examples and Use Cases
Yield on Cost is particularly useful for investors focusing on dividend growth stocks or income planning. Here are some practical examples:
- Dividend Aristocrats: Investors holding shares in Coca-Cola or Johnson & Johnson often see their YOC rise as these companies consistently increase dividends.
- Airline Sector: Shareholders in Delta or American Airlines who purchased stock before dividend hikes can observe a growing yield on cost despite market volatility.
- Income Planning: Those building portfolios with monthly payouts can track YOC to forecast future income streams, complementing research on best monthly dividend stocks.
Important Considerations
While YOC provides valuable insights, it is a backward-looking metric and should not be the sole factor guiding your investment decisions. It assumes the company will continue raising dividends, which may not occur in all cases.
Additionally, reinvesting dividends alters your cost basis, potentially complicating YOC calculations. It's wise to use YOC alongside broader strategies like factor investing and market analysis to assess your portfolio’s health comprehensively.
Final Words
Yield on Cost highlights how your dividend income has grown relative to your original investment, making it a valuable metric for assessing dividend growth success. To put this into practice, calculate your YOC for key holdings and compare it against current dividend yields to gauge performance over time.
Frequently Asked Questions
Yield on Cost (YOC) is a financial metric that measures the annual dividend income from an investment divided by the original purchase price, expressed as a percentage. It helps investors understand how the income from their initial investment has grown over time.
Yield on Cost is calculated by dividing the annual dividend per share by the original purchase price per share, then multiplying by 100 to get a percentage. For example, if you bought a stock at $50 and it pays $2 in dividends annually, the YOC is 4%.
Current dividend yield is based on the stock's current market price, showing what your investment earns right now. Yield on Cost, on the other hand, compares dividends to your original purchase price, offering a historical view of how your investment’s income has grown.
YOC is important for long-term investors, especially those focused on dividend growth, because it shows how much the dividend yield has increased relative to the original investment. An increasing YOC over time reflects successful dividend growth and higher income from the initial purchase.
While YOC helps forecast potential income streams based on past dividend growth, it is backward-looking and doesn’t guarantee future dividends. Investors should only rely on YOC if they believe the company will continue to raise its dividends.
Yield on Cost offers several advantages, such as tracking long-term returns from dividend increases, evaluating investment strategy effectiveness, comparing dividend stocks over time, and assisting with retirement or income planning.
Yes, YOC is backward-looking and doesn’t account for changes in market price or future dividend cuts. It should not be the sole reason to hold a stock unless you expect continued dividend growth.
