Yield on Cost Definition
Yield on Cost (YOC)
Definition
Yield on Cost (YOC) is a personal rate of return metric used by income investors. It measures the current annual dividend (or distribution) an investment generates as a percentage of its original purchase price (cost basis), not its current market price.
Unlike the standard dividend yield (Current Yield), which fluctuates with the market price, YOC is fixed to the investor’s personal entry point. It visually demonstrates how dividend growth over time increases the effective yield on the initial capital committed, highlighting the compounding power of reinvested income and rewarding long-term ownership of quality assets.
Formula & Calculation
text
Yield on Cost (YOC) = (Current Annual Dividend per Share / Original Purchase Price per Share) x 100
Illustrative Example:
- Initial Purchase (Year 0): Buy a stock for $50 per share. Its annual dividend is $1.00.
- *Initial Yield at Cost: ($1.00 / $50) x 100 = 2.0%*
- Ten Years Later (Year 10): The company has grown its dividend annually. The current annual dividend is now $3.00 per share. The market price has risen to $120.
- Current Dividend Yield: ($3.00 / $120) x 100 = 2.5% (This is the yield a new buyer would get).
- Your Yield on Cost: ($3.00 / $50) x 100 = 6.0% (This is your personal yield on your original investment).
Interpretation for Income Investors
A rising YOC is the hallmark of a successful dividend-growth strategy. It represents the increasing cash flow efficiency of your original capital.
- Primary Utility: Psychological & Tracking. YOC provides tangible proof of a strategy’s success, decoupling the income stream from short-term market volatility. It answers: “How much annual income am I getting today for every dollar I originally invested?”
- Strategic Insight: A high and growing YOC indicates strong dividend growth and successful long-term holding. It turns a static investment into a story of compounding.
Advantages & Limitations
| Advantage (Strength) | Limitation (Caution) |
|---|---|
| Motivational Metric: Visually rewards patience and a long-term outlook. | Backward-Looking: A historical measure. Does not reflect current valuation or opportunity. |
| Highlights Compounding: Isolates the power of dividend growth over time. | Can Mask Risk: A very high YOC (e.g., 15%) on a stock whose business is failing is a warning sign, not a badge of honor. |
| Focuses on Income Stream: Emphasizes the growing cash flow, not the asset’s price. | Personal, Not Comparative: Cannot be used to compare different investments or investors. Your YOC on Company A is unique to your purchase price. |
Common Pitfalls to Avoid
- The “Yield Trap” Fallacy: Never hold a deteriorating asset solely because it shows a high YOC. The sustainability of the dividend is paramount.
- Misuse for New Investments: YOC is irrelevant for evaluating a potential new purchase. For that, use the Current Yield and assess dividend safety and growth potential.
- Ignoring Total Return: YOC is an income-focused metric. It should not replace analysis of total return (income + capital appreciation).
Summary
Yield on Cost is the diary of a patient income investor. It is a powerful tool for tracking the success of a dividend-growth strategy and measuring the increasing cash-on-cash return from one’s original capital. However, it is a reward for past decisions, not a standalone tool for future investment decisions. It must always be considered alongside the fundamental health of the underlying asset and its current valuation.
Yield on Cost Definition