Key takeaways
– Yield on Cost (YOC) = current annual dividend income ÷ original purchase cost. It shows the dividend yield relative to the price you actually paid, not the market price today.
– YOC can rise dramatically over time as a company grows its dividend, making it a useful metric for long-term dividend investors—but it can be misleading if used alone.
– Always track total cost (all purchases, reinvested dividends, commissions) and compare apples-to-apples (current yields, dividend growth prospects, payout sustainability) when making buy/sell decisions.
Source: Investopedia — “Yield on Cost (YOC)”
1) What is Yield on Cost (YOC)?
– Definition: YOC measures the dividend yield based on the investor’s original purchase price (cost basis), not the stock’s current market price.
– Formula (single-lot):
YOC (%) = (Current annual dividend per share ÷ Original purchase price per share) × 100
– Example (single-lot): Buy at $20, current dividend = $1.50 → YOC = (1.50 ÷ 20) × 100 = 7.5%.
2) Why investors use YOC
– Shows how effective dividend growth has been for your original investment.
– Helps long-term income investors visualize the income-generating power of a holding relative to what they originally paid.
– Useful motivational statistic for buy-and-hold dividend strategies.
3) Important distinctions and limitations
– YOC vs Current Dividend Yield:
• Current dividend yield = current annual dividend ÷ current market price.
• YOC is based on original cost. Comparing YOC to another company’s current yield is comparing incongruent measures.
– Survivorship and hindsight bias: YOC rewards stocks that have successfully raised dividends; it ignores companies that cut dividends or failed.
– Not a total-return metric: YOC measures income yield only; capital gains/losses also matter.
– Opportunity cost: A high YOC on an underperforming stock may still be a poor use of capital if better current yields or growth prospects exist elsewhere.
– Dividend growth is not guaranteed; YOC can fall if dividends are cut.
4) Calculating YOC for more realistic situations
– Multiple purchases (lots), reinvested dividends, fees:
• Compute total cost basis = sum of all purchase amounts + reinvested dividends + transaction fees (if relevant for your decision).
• Compute total expected annual dividend = current annual dividend per share × total shares owned (after splits/DRIP).
• Portfolio YOC (%) = (Total expected annual dividend ÷ Total cost basis) × 100
– Example (multiple lots):
• Buy 100 shares at $20 → cost $2,000
• Buy 50 shares at $30 → cost $1,500
• Total cost = $3,500; total shares = 150
• Current dividend = $2.00 per share → annual dividend = 150 × 2 = $300
• YOC = 300 ÷ 3,500 = 8.57%
– Reinvested Dividends (DRIP): Add the dollar value of dividends reinvested to your total cost basis. Also include commissions that increased your effective cost.
– Stock splits: Adjust share counts and per-share cost basis accordingly—total cost basis remains the same but cost per share is divided by the split factor.
5) Projecting future YOC
– If you expect dividend growth at rate g (annual %), projected dividend after n years = current dividend × (1 + g)^n.
– Projected YOC after n years = projected dividend per share ÷ original purchase price.
– Use realistic, conservative dividend-growth assumptions and consider payout ratio and cash-flow coverage when forecasting g.
6) How to use YOC in investment decisions — practical steps
Step 1 — Gather records
– Export or collect transaction history: all buy orders, reinvested dividends, commissions/fees, shares held after splits.
Step 2 — Calculate accurate cost basis
– Add original purchases + reinvested dividends + transaction fees. Adjust for splits. This is your denominator.
Step 3 — Calculate current annual dividend income
– Get the company’s most recent declared annual dividend per share (or expected annualized dividend) and multiply by shares owned. This is your numerator.
Step 4 — Compute YOC (per-share and portfolio)
– Per-share YOC: current dividend per share ÷ original purchase price per share.
– Portfolio YOC: total expected annual dividends ÷ total cost basis.
Step 5 — Compare correctly
– Compare your portfolio YOC to:
• The stock’s current dividend yield (current dividend ÷ current market price).
• Yields of alternative investments (other dividend stocks, bond yields), using their current yields—not their YOC.
– Evaluate dividend growth prospects: A higher current yield elsewhere may make sense if the new company also has equal or better dividend-growth prospects and similar risk.
Step 6 — Assess dividend sustainability and company fundamentals
– Check payout ratio, free cash flow, earnings stability, balance sheet, industry outlook. A rising YOC is valuable only if dividends are likely sustainable.
Step 7 — Consider taxes and transaction costs
– Taxes on dividends (qualified vs ordinary), capital gains tax on a sale, and commissions reduce the net benefit of switching or selling.
Step 8 — Make a decision rule
– Examples of practical rules:
• Hold if current yield of holding plus expected dividend-growth-driven yield increase (and fundamentals) are better than alternatives on a risk-adjusted basis.
• Consider selling if dividend cuts are likely, fundamentals have materially deteriorated, or redeploying proceeds produces a materially higher after-tax expected cash return with similar risk.
• Rebalance if the position’s weight is out of target allocation regardless of YOC.
7) Example scenario (Emma / portfolio manager) — practical takeaway
– Emma’s original cost = $10, current dividend = $3.50 → YOC = 35%.
– Current market price $50 → current dividend yield = 3.50 ÷ 50 = 7.0%.
– Manager switches to ABC with current yield 8.5% (market yield).
– Correct comparison: compare current yields (7.0% vs 8.5%) and expected dividend growth. YOC (35%) is a backward-looking metric about income relative to original cost, not an indicator of what her money will earn going forward if she sells and redeploys.
8) Common mistakes to avoid
– Comparing YOC to other companies’ current yield.
– Ignoring total return and capital appreciation prospects.
– Forgetting reinvested dividends and fees when computing cost basis.
– Using YOC to justify holding a business that has deteriorating fundamentals.
– Over-relying on past dividend growth to predict future increases.
9) Practical tools and recordkeeping tips
– Use your broker’s cost-basis reports and dividend history.
– Maintain a spreadsheet or portfolio tracker that logs: date, shares purchased, price, commissions, dividends received/reinvested, splits. Compute rolling portfolio YOC.
– Consider portfolio management tools or financial software that tracks tax lots and cost basis automatically.
10) When YOC is most useful
– For long-term income investors who want to monitor how dividend growth has increased income relative to original invested capital.
– For personal satisfaction and behavioral benefits—YOC can reinforce a long-term buy-and-hold discipline.
– As a complement (not a substitute) to forward-looking valuation, income sustainability analysis, and comparison of alternative investments.
Conclusion
Yield on Cost is a simple, emotionally satisfying metric that shows how the income from a holding compares to what you originally paid. It’s useful for tracking the income productivity of long-held dividend stocks but must be used carefully. For forward-looking investment decisions you should compare current yields, consider dividend growth prospects and sustainability, include taxes and transaction costs, and evaluate alternatives on a risk-adjusted, total-return basis.
Source
– Investopedia, “Yield on Cost (YOC)” —
Editor’s note: The following topics are reserved for upcoming updates and will be expanded with detailed examples and datasets.