Yield on Cost (YOC)

What Is Yield on Cost (YOC)?

Yield on cost (YOC) is a measure of dividend yield calculated by separating a stock's current dividend by the price initially paid for that stock. For instance, assuming an investor purchased a stock a long time back for $20, and its current dividend is $1.50 per share, then, at that point, the YOC for that stock would be 7.5%.

YOC ought not be mistaken for the term "current dividend yield." The last option alludes to the dividend payment separated by the stock's current price, as opposed to the price at which it was initially purchased.

Grasping Yield on Cost (YOC)

YOC shows the dividend yield associated with the initial price paid for an investment. Hence, stocks that have developed their dividends after some time can deliver exceptionally high YOCs, particularly assuming the investor has held on to the stock for a long time. As a matter of fact, it isn't unusual for long-term investors to claim stocks whose current dividend payments are higher than the original price paid for the security, delivering a YOC of 100% or greater.

YOC is calculated in light of the initial price paid for a security. Subsequently, investors must ensure they keep track of the holding costs they have incurred for that security after some time, as well as any extra share purchases they have made. These costs ought to be remembered for the cost part of the YOC calculation. Any other way, the yield will show up ridiculously high.

While assessing dividend yields, investors must likewise be careful not to compare apples and oranges. In particular, just on the grounds that a stock's YOC is higher than the current dividend yield of another company, it doesn't mean that the stock with the higher YOC is essentially the better investment. That is on the grounds that the company with the high YOC may really have a lower current dividend yield than different companies.

In these circumstances, the investor could be better off selling their shares in the high YOC company and investing the proceeds in a company with a higher current dividend yield.

Taking into account (YOC) shows investors the long-term benefits of stocks compared to bonds. Since bonds pay fixed interest rates as opposed to dividends that develop, they have considerably less long-term potential.

Illustration of Yield on Cost (YOC)

Emma is a retired person who is evaluating her benefits' investment returns. Her portfolio remembers a large position for XYZ Corporation, which her portfolio manager purchased quite a while back for $10/share. At the point when it was purchased, XYZ had a current dividend yield of 5% in light of a dividend of $0.50 per share.

In every one of the 15 years that followed, XYZ raised its dividend by $0.20 each year. It is expected to pay $3.50 per share this year. Its stock price has ascended to $50 per share, bringing about a YOC of 35% ($3.50 partitioned by the initial $10/share purchase price) and a current dividend yield of 7% ($3.50 separated by the current $50 share price).

Emma considers XYZ to have been quite possibly of her best investment. She removes satisfaction from seeing the grand YOC that it delivers consistently. Investigating the latest report from her portfolio manager, she was in this manner stunned to find that they had sold the XYZ position. The manager reinvested the proceeds in ABC Industries, a company with comparable financial strength as XYZ, yet with a current yield of 8.50%. Alarmed by this apparently silly decision, Emma calls her portfolio manager. She inquires as to why they sold a position yielding 35% in exchange for one yielding just 8.50%.

The portfolio manager makes sense of for Emma that she has committed a common error. As opposed to contrasting YOC with the current dividend yield, she ought to make logical comparison between the two companies' current dividend yields. According to this point of view, switching to ABC was maybe an insightful decision since it offered a higher yield on her cash — 8.50% versus 7%. Be that as it may, the two companies' dividend growth possibilities are more important to keep expanding the yield on cost.

Highlights

• Investors utilizing YOC ought to guarantee they don't compare it to other stocks' current dividend yields, as this is inconsistent comparison.
• YOC is a measure of dividend yield in view of the original price paid for the investment.
• YOC can develop essentially over the long run on the off chance that the company consistently builds its dividend, so investing for dividend growth is the way for long-term investors to augment YOC.