Yield on Cost (YOC)
Candlefocus EditorYOC can be a valuable metric for investors who are seeking consistent, reliable income from their investments. On the other hand, it may be overlooked by those investors who are focused on capital appreciation and obtaining the highest yields in the shortest amount of time.
The primary benefit of YOC is that it captures the compounding returns of dividend growth over time. If a company regularly increases its dividend, the YOC could increase significantly even as the current dividend yield remains consistent. This is why investing for dividend growth is the best way to maximize YOC.
YOC is considered a better long-term measure of dividend yield than current dividend yield, which is based on the current share price instead of the original purchase price. Therefore, it is important that investors not compare YOC across different stocks, as this is an apples-to-oranges comparison.
YOC can be calculated by dividing the current annual dividend payout amount by the original purchase price. For example, if an investor originally purchased a share of stock at $20 a share and it now pays out $2 in annual dividends, its YOC would be 10%.
In conclusion, Yield on Cost is an important metric for long-term investors who are investing for dividend growth. It captures the compounding returns of dividend growth over time and serves as a baseline for gauging investment performance beyond just the current dividend yield. It is important for investors to keep in mind that YOC should be compared only within the same stock, as it is based on the original purchase price.