Yield on Cost Explained: Assessing Long-Term Investment Performance

The return on cost (YOC) shows the dividend return based on the price at which the stock was bought in the first place. To find it, divide the present dividend on a stock by the price that stock was bought for in the first place. The YOC would be 7.5% if a trader bought a stock five years ago for $20, and now it pays out $1.50 per share in dividends.

YOC shows the dividend yield that is linked to the price of the original investment. Stocks whose payouts go up over time can give you a high YOC, sometimes more than 100% if you hold on to them for a long time. For correct YOC calculations that don’t lead to unrealistically high yields, it’s important to keep track of holding costs and extra share purchases.

When comparing YOCs to stocks, you should be careful because it might not show which is a better option. A high YOC doesn’t always mean a better current dividend yield, which makes investors think about moving their money around based on current dividend yields.

Emma is a retired woman who is looking over the investment results on her pension. XYZ Corp. is in her portfolio. She bought it 15 years ago for $10 per share with a 5% starting dividend yield. XYZ has been increasing its dividend by $0.20 a year, and this year it will pay $3.50 per share. With a split of $3.50 from the initial $10 per share, it yields 35%. Emma’s portfolio manager switched to ABC Industries, which had an 8.50% current yield, even though it had a 35% YOC. This shows how important it is to compare current dividend yields when making investment choices.

YOC shows the dividend yield based on the initial purchase price. This shows how much of an income an investor gets compared to the amount they invested in the first place.

Investors shouldn’t count on YOC alone to track dividend growth, but it can help. To make smart financial choices, you need to compare the current dividend yields of different stocks.