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When it comes to dividend investing, the yield on cost (YOC) is an important ratio used by income investors. Similar to the dividend yield ratio, the YOC can show the actual yield of the original investment. This is a useful equation for long term income investors as it highlights the true return on investment, as it pertains to their individual portfolio.
As long as the number of shares owned by the investor does not change, the yield on cost will increase when the company raises its dividend and you reinvest in additional shares. On the other hand, if a company makes a dividend cut, then the YOC will decrease. It is also important to note that if an investor adds shares to the original lot, the average price per share should be used to reflect exactly what was paid to invest in the stock.
While the current yield of a stock can be found on most financial websites, the yield on cost cannot. Since the ratio reflects the price per share paid, which is different for everyone, it is up to the individual shareholder to run their own calculation.
How to Calculate the Yield on Cost
To calculate the yield on cost for a stock, the investor must first determine their average price per share. Most online brokers should have this information available to investors. If your broker does not already have this data available, then calculate the average price per share on your own.
After the price per share is determined the investor must find the company’s annual dividend, which should be available for free on any website that reports on the stock market. Once this data has been collected, divide the annual dividend by your average cost per share as shown below.
YOC = Annual Dividend / Average Cost per Share
Let’s say you purchased the following lots of shares in company ABC.
- 25 shares @ $20 = $500
- 35 shares @ $15 = $525
The total cost to own 60 shares of the stock would have run $1,025, or $17.08 per share. If the company has paid $1.00 in dividends per share over the past 12 months, then your investment would return 5.85% as calculated below.
YOC = $1.00 / $17.08
While there are some similarities, the dividend yield and the yield on cost have two very different results. The dividend yield represents the return on investment calculated at the current share price in the market. The YOC, on the other hand provides a specific yield based on what the investor paid to own shares of a stock.
Both financial ratios are important to income investors and should be used in combination whenever possible for analysis.