Yield on cost (YOC) is a powerful metric that every dividend investor should understand. It involves calculating the dividend yield based on the initial price paid for a stock. For instance, if an investor buys a stock for $20 and currently earns $1.50 per share in dividends, the YOC would be an impressive 7.5%.
YOC differs from the current dividend yield which divides the current dividend by the stock’s current price. Here’s why YOC matters and how it can skyrocket your long-term investment performance.
Key Highlights 💡
- YOC Basics: It calculates dividend yield from the original investment amount.
- Growth Over Time: YOC can increase dramatically if a company systematically raises dividends, making it invaluable for long-term investors.
- Comparison Cautions: Always compare YOC with care, ensuring you don’t mistake it for current yield comparisons.
The Magic Behind YOC ✨
YOC reveals the dividend yield linked to the initial cost of an investment. Stocks that continuously grow their dividends can offer extremely high YOCs, especially to investors holding them for lengthy periods. It’s not uncommon for persistent investors to attain stocks with dividend yields surpassing the initial investment cost, achieving YOCs of 100% or more.
Keep in mind, YOC calculations rely on the initial purchase price. Investors must track all their costs, including any additional share purchases, to ensure an accurate YOC. This avoids an unrealistically inflated yield.
Strikingly, comparing YOC to current dividend yields can be misleading. A high YOC stock isn’t necessarily a better buy than another with a higher current yield. To make prudent decisions, investors should compare stocks’ current yields adequately. In such cases, selling a high-YOC stock to buy a higher current-yield stock may make financial sense.
A Real-World Example 🌱
Here’s an enhanced example to illustrate YOC’s impact:
Emma, a retiree, reviews the investment returns in her portfolio. She notices her manager bought XYZ Corporation shares 15 years ago at $10 per share. At purchase, XYZ declared a 5% yield with $0.50 per share. Impressively, XYZ increased its dividend by $0.20 annually for 15 years, currently set to pay $3.50 per share.
With XYZ’s current stock price at $50, Emma’s YOC is a whopping 35% (calculated as $3.50 / $10). Meanwhile, its current dividend yield is 7% ($3.50 / $50). Emma, delighted with her returns, is stunned to learn her manager sold XYZ to buy ABC Industries offering an 8.50% current yield.
In querying the decision, Emma learns she should compare current dividend yields, not YOC versus another stock. Switching to ABC might be prudent since it offers a higher current yield (8.50% vs. 7%). To keep boosting her YOC, Emma should focus on companies with solid dividend growth trajectories.
Transforming your investment approach by understanding and leveraging YOC can substantially boost your returns. With the right strategy, dividend stock investments can grow impressively over the years, illustrating the significant, lasting value of knowledgeable investing.
Is Yield on Cost a part of your investment arsenal? Experience its long-term benefits and bolster your portfolio today!
Related Terms: Dividend Yield, Current Dividend Yield, Dividend Growth.
