"Yield on Cost"
Simple Definition
Yield on Cost (YoC), also known as Cost Yield, is a measure of the dividend income you are receiving relative to the original price you paid for a stock. It's a personalized metric that shows you the effective return your initial investment is generating based on the dividends it pays.
It's different from the standard Dividend Yield you see on financial websites, which is based on the stock's current market price.
The Formula
The calculation is very straightforward:
Yield on Cost = (Annual Dividend Per Share / Your Original Cost Per Share) × 100
Key Distinction: Yield on Cost vs. Current Dividend Yield
This is the most important concept to grasp:
Yield on Cost (YoC): Backward-looking & Personal. It tells you the return on your specific investment.
Current Dividend Yield: Forward-looking & General. It tells a new investor today what their potential return would be if they bought at the current price.
Current Dividend Yield = (Annual Dividend Per Share / Current Market Price Per Share) × 100
Examples to Illustrate
Let's walk through a few scenarios.
Example 1: The Basic Purchase
You buy shares of "Company A" at $100 per share.
Company A pays an annual dividend of $4 per share.
At the time of your purchase, your Yield on Cost is identical to the Current Dividend Yield: ($4 / $100) x 100 = 4%.
This is your starting point.
Example 2: The Power of a Rising Dividend (The "YoC Magic")
This is where Yield on Cost becomes impressive. Let's fast-forward five years.
Your Original Cost: Still $100 per share.
Company A's Performance: The company has done well and consistently raises its dividend. The annual dividend is now $6 per share.
The Stock Price: It has also risen and now trades at $150 per share.
Let's calculate both yields:
Your Yield on Cost:
Annual Dividend = $6
Original Cost = $100
YoC = ($6 / $100) x 100 = 6%
Current Dividend Yield (for a new investor):
Annual Dividend = $6
Current Price = $150
Current Yield = ($6 / $150) x 100 = 4%
What this means for you: While a new investor only gets a 4% yield, you are effectively earning a 6% return on your original $100 investment. Your yield has grown without you having to invest more money.
Example 3: A Real-World "Dividend Aristocrat" - Johnson & Johnson (JNJ)
Imagine you bought Johnson & Johnson stock 20 years ago.
Your Purchase (circa 2004): You bought at $40 per share.
Dividend Then: The annual dividend was, for example, $0.80 per share.
*Your initial YoC was: ($0.80 / $40) x 100 = 2%.*
Today's Reality (2024): JNJ has raised its dividend every year for decades. The annual dividend is now $4.96 per share.
Current Stock Price: It's around $155 per share.
Let's calculate:
Your Yield on Cost Today:
YoC = ($4.96 / $40) x 100 = 12.4%
Current Dividend Yield Today:
Current Yield = ($4.96 / $155) x 100 = 3.2%
As a long-term holder, you are enjoying a massive 12.4% effective yield on your initial capital, while a new buyer today would only get 3.2%. This demonstrates the incredible power of dividend growth investing.
Why is Yield on Cost Important?
Tracks Investment Success: It shows you the tangible income return your initial decision is generating. A rising YoC is a clear sign that your investment is performing well from an income perspective.
Highlights the Power of Dividend Growth: It quantifies the benefit of investing in companies that consistently increase their dividends.
Provides Psychological Comfort: During market downturns, if the stock price falls, your Yield on Cost remains unchanged or may even continue to grow if the dividend is raised. This can help long-term investors stay the course.
Helps with Income Planning: For retirees, YoC is a practical number. They can look at their portfolio and see, "This chunk of money I invested is now yielding me 8% in annual income," which is useful for budgeting.
Limitations of Yield on Cost
It's a powerful tool, but it's not perfect.
Not a Measure of Total Return: YoC ignores capital appreciation (or depreciation). A stock could have a high YoC but a fallen price, resulting in a net loss.
Can Create Complacency: A very high YoC might make an investor reluctant to sell a stock, even if the company's future prospects have dimmed. It's a backward-looking metric and shouldn't be the sole reason for holding an investment.
Doesn't Reflect Opportunity Cost: That 12.4% YoC on JNJ is impressive, but it doesn't tell you if that money could be earning a better total return elsewhere.
Summary
| Feature | Yield on Cost (YoC) | Current Dividend Yield |
|---|---|---|
| Purpose | Measures your personal dividend return | Measures the current market's dividend return |
| Formula | Annual Dividend / Your Cost | Annual Dividend / Current Price |
| Perspective | Backward-looking, Personal | Forward-looking, General |
| Key Driver | Dividend Growth over time | The stock's current market price |
In short, Yield on Cost is the reward for being a patient, long-term investor in high-quality companies that grow their dividends. It's a metric of pride and a testament to the power of compounding.
