Yield on Cost (YOC)

Yield on Cost (YOC)

What it is

Yield on Cost (YOC) measures the dividend return on an investment based on the price you originally paid, not the stock’s current market price. It shows how much dividend income your original outlay is generating today and highlights the impact of dividend growth over time.

How to calculate

• Simple single-purchase formula:
  YOC = (Current annual dividend per share) / (Original purchase price per share)
  Example: Bought at $20, current annual dividend $1.50 → YOC = 1.50 / 20 = 7.5%.

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• Multiple purchases or reinvested dividends:
  Calculate your cost basis per share first:
  Cost basis per share = (Total amount invested, including transaction costs) / (Total shares owned)
  Then YOC = (Current annual dividend per share) / (Cost basis per share).

Example

An investor bought shares of XYZ at $10 fifteen years ago. XYZ raised its dividend by $0.20 per share each year and now pays $3.50 annually. The stock’s current price is $50.
– YOC = 3.50 / 10 = 35%
– Current dividend yield = 3.50 / 50 = 7%

This illustrates how dividend growth can produce a much higher YOC than the present dividend yield based on market price.

Why YOC matters

• Shows the long-term benefit of dividend growth: companies that consistently raise dividends can substantially increase the yield relative to the original purchase price.
• Provides a personal performance metric for buy-and-hold investors who value growing income from a fixed initial investment.
• Can exceed 100% over time if cumulative dividends received surpass the initial investment amount (a possibility not available with fixed-rate bonds).

Limitations and common pitfalls

• Not a fair comparison across investments: YOC is tied to your purchase price, so two investors in the same stock may have very different YOCs. Comparing one investor’s YOC to another company’s current yield misleads.
• Ignores capital gains/losses and opportunity cost: YOC focuses only on dividend income relative to cost basis, not total return or whether funds could have earned more elsewhere.
• Vulnerable to dividend cuts: A high YOC can evaporate if a company reduces or suspends dividends.
• Must include all costs and additional purchases: Failing to factor in added shares, reinvested dividends, or transaction costs will overstate YOC.

How to use YOC sensibly

• Use YOC to track how well dividend growth has increased the income power of your original investment.
• Compare current dividend yields (not YOC) when choosing between different dividend-paying investments at a point in time.
• Combine YOC with assessments of dividend sustainability and growth prospects; a rising YOC is only valuable if dividends are likely to continue or grow.
• Recompute YOC after additional purchases by using the updated cost basis per share.

Key takeaways

• YOC = current annual dividend ÷ original cost per share; it measures dividend income relative to what you paid.
• It highlights the value of dividend growth for long-term investors, but can be misleading if used to compare different investments.
• Always consider current yield, dividend growth prospects, total return, and dividend sustainability alongside YOC when making investment decisions.