What is Yield on Cost and Why Should You Care?
Yield on Cost (YOC) is a measure that looks at the dividend yield of a stock based on its initial purchase price. It tells you how much return you're getting annually in dividends relative to what you initially paid for the stock.
Savvy investors keep an eye on YOC to understand their long-term investment performance. It's a great way to gauge whether your investment is growing, especially if you're reinvesting dividends or holding onto the stock over many years. Tracking YOC can also help you identify which stocks are providing the best returns.
How to Calculate Yield on Cost
Divide the current annual dividend by the initial cost of the stock and multiply by 100 to convert to a percentage:
[\text{YOC} = \frac{\text{Current Dividend}}{\text{Initial Stock Cost}} \times 100]
Where:
- Current Dividend is the annual dividend per share
- Initial Stock Cost is the purchase price per share
Calculation Example
Example 1
Suppose you bought a stock for $50 per share five years ago. Today, it pays a current annual dividend of $3 per share.
- Current Dividend: $3
- Initial Stock Cost: $50
[\text{YOC} = \frac{3}{50} \times 100 = 6%]
Your Yield on Cost is 6%.
Example 2
If you bought stock for $40 per share and it now pays an annual dividend of $2.50:
- Current Dividend: $2.50
- Initial Stock Cost: $40
[\text{YOC} = \frac{2.50}{40} \times 100 = 6.25%]
Your Yield on Cost is 6.25%.
The Takeaway
Keep an eye on Yield on Cost to evaluate how much your initial investment is paying off in terms of dividends. It's a simple yet powerful metric that provides invaluable insight into your portfolio's long-term performance.