Yield on Cost (YOC) Explained: Examples and Insights for 2025

Thomas J Catalano, a Certified Financial Planner and Registered Investment Adviser in South Carolina, founded his financial advisory firm in 2018. His expertise spans investments, retirement planning, insurance, and comprehensive financial strategies.

Understanding Yield on Cost (YOC)

Yield on Cost (YOC) is a key metric that measures the dividend yield based on the original purchase price of a stock. For instance, if an investor bought shares at $20 each five years ago and the current dividend per share is $1.50, the YOC would be 7.5%.

It’s important to distinguish YOC from the current dividend yield, which calculates dividend relative to the stock’s present market price rather than the initial investment cost.

Key Points to Remember

• YOC reflects dividend yield using the price originally paid for the stock.
• Consistent dividend growth can substantially increase YOC over time, making it a valuable metric for long-term investors.
• Comparing YOC with other stocks’ current dividend yields can be misleading, as these metrics measure different things.

Why Yield on Cost Matters

YOC highlights the power of dividend growth investing. Stocks that regularly increase dividends can yield returns surpassing the initial investment cost, sometimes exceeding 100% YOC for long-term holders.

Accurate YOC calculation requires tracking all purchase costs and additional shares acquired, ensuring the cost basis reflects total investment to avoid inflated yields.

Investors should avoid comparing YOC directly with other stocks’ current yields. A stock with a high YOC might have a lower current dividend yield, which could influence decisions about reallocating investments.

In such cases, selling a high YOC stock to invest in a company with a higher current dividend yield might be beneficial depending on income goals.

Important Consideration

YOC demonstrates the long-term advantage of dividend-paying stocks over bonds, as bonds offer fixed interest rates without the potential for dividend growth.

Yield on Cost in Action: A Practical Example

Emma, a retiree, reviews her portfolio which includes shares of XYZ Corporation purchased 15 years ago at $10 each. At purchase, XYZ’s dividend yield was 5%, with a $0.50 dividend per share.

Over 15 years, XYZ increased its dividend by $0.20 annually, now paying $3.50 per share. The stock price has risen to $50, resulting in a YOC of 35% ($3.50 dividend divided by $10 original price) and a current dividend yield of 7% ($3.50 divided by $50 current price).

Emma values the high YOC and is surprised when her portfolio manager sells XYZ shares to buy ABC Industries, which offers an 8.50% current yield but no information on dividend growth.

The manager explains that Emma’s focus should be on comparing current dividend yields rather than YOC. Switching to ABC provides a higher immediate income yield (8.50% vs. 7%), though dividend growth prospects remain crucial for increasing YOC long term.

Explore useful articles in Stock Trading as of 18-11-2020. The article titled " Yield on Cost (YOC) Explained: Examples and Insights for 2025 " offers in-depth analysis and practical advice in the Stock Trading field. Each article is carefully crafted by experts to provide maximum value to readers.

The " Yield on Cost (YOC) Explained: Examples and Insights for 2025 " article expands your knowledge in Stock Trading, keeps you informed about the latest developments, and helps you make well-informed decisions. Each article is based on unique content, ensuring originality and quality.