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One of the filters I use in my stock selection process is to look for companies with a current yield greater than 2.5%. Any company paying below that value will automatically be filtered out of my watch list.
While the current yield is a great tool for dividend investors to use to find stocks, it is not very helpful once you have purchased them. Since the current yield is calculated using the current share price, it is irrelevant once you have made your purchase.
So how would an investor know their dividend yield on shares they already own? The yield on cost is a simple, but effective calculation investors can use to track their return for shares in their portfolio.
How to Calculate Yield on Cost
In order to calculate the yield on cost for stocks in your portfolio, investors will need a few pieces of information. First, you will need to know the average price per share that you have paid to own a stock. Your brokerage account should have this information readily available if you don’t track it on your own.
I prefer to track all of my transactions in a spreadsheet to stay up to date with my investments.
The second piece of information you will need is the annual dividend for the stock. This information will be available through most financial websites like Yahoo! Finance or from the DRiP Investing Resource Center. You can also usually find this information available through your brokerage account or on the shareholder page of the company website.
Once you have both pieces of information, you can calculate the yield on cost (YOC) for the stock using the formula below.
YOC = Annual Dividend / Average Price per Share
Note – The calculation above uses the average price instead of the current price per share. If you were to use the current share price the result would equal the current dividend yield.
Calculating My Yield on Cost
In order to better understand calculating the YOC of a stock, let’s look at an example of a company that I currently own. Here are the 5 purchases I have made for shares of McDonald’s (MCD) over the past couple of years.
Note – McDonald’s is one of the many blue chip companies that make up the Money Sprout Index.
Here are my 5 purchases of MCD –
- 13.00 shares @ $79.15 = $1,028.97
- 18.00 shares @ $95.08 = $1,711.47
- .27 shares @ $93.21 = $25.00
- .53 shares @ $94.65 = $50.00
- .54 shares @ $92.87 = $50.00
The first 2 transactions were lump sum purchases made through my Fidelity brokerage account years ago. The last 3 are much smaller purchases made recently through my LOYAL3 account. All of the purchases ranged from a low share price of $79.15 to a high of $95.08.
Here are the 5 steps I use to calculate the yield on cost for the MCD shares that I own.
Step #1 – Calculate Total Shares Owned
The first step in my calculation is to total the number of shares I own of MCD.
I have purchased a total of 32.34 shares of McDonald’s over the past couple of years. There are the 31 shares bought through 2 different lump sum transactions. Then there are an additional 1.34 shares purchased from 3 smaller investments through LOYAL3.
In addition to the shares I have purchased, I have also been reinvesting my dividend payments into new shares of MCD for many years. For the past 5 years, I have accumulated an additional 2.96 shares of MCD through DRiP.
The total number of shares of MCD I currently own is 35.30, after adding in my DRiP shares.
Total Shares of MCD = 35.30
Step #2 – Calculate Total Cost
The next step is to calculate the total cost paid to own shares of MCD. Adding up the 5 transactions listed above, I have a paid a total of $2,865.44 to purchase the 32.34 shares of stock.
So what about the DRiP shares? I don’t factor those into my total cost, since I am simply reinvesting dividend dollars back into new shares of the stock.
So, my total amount paid to own all 35.30 is still $2,865.44.
Step #3 – Calculate the Average Share Price
Now that we have our total shares owned (35.30) and total cost paid ($2,865.44), we can calculate the average share price.
My average price paid for MCD shares is $81.17.
Average Share Price = $2,865.44 / 35.30.
Note – As long as I continue to reinvest my dividends and don’t make any new lump sum purchases – the average share price will slowly drop over time.
Step #4 – Find Current Annual Dividend
The next step is simple. Go out and grab the current annual dividend of the stock. I like to use Yahoo! Finance, but there are tons of places you can find this information.
At the time of this writing, McDonald’s had a annual yield of – $3.40.
Note – Hopefully over time this value continues to rise each year. If the dividend increases annually, then my yield on cost for the stock will rise with it.
Step #5 – Calculate the Yield on Cost
The last step is to calculate the yield on cost. We take the current yield and divide it by our average purchase price.
In the case of McDonald’s, my yield on cost for shares that I own is – 4.20%.
YOC = $3.40 / $81.17 OR 4.20%
Analyzing the Numbers
At the time of this writing, the company had a dividend yield of 3.50%. This means that if I were to have purchased new shares of MCD stock at that time, I would earn a 3.50% yield on my investment (based on the current dividend).
As you can tell, my YOC of 4.20% is higher than the current rate, which means my average price paid for the stock is lower than the current price.
Over the long term, I expect my yield on cost to continue to grow higher than the current rate – provided the company continues to raise its distribution.
Do you use the YOC calculation to analyze your current holdings?