What Is Yield on Cost (YOC)?
Yield on Cost (YOC) is an investment calculation used to determine the dividend yield of a stock based on the price originally paid for it. Unlike the ‘current dividend yield’ which bases calculations on the stock’s present market price, YOC offers a picture of performance over the period of the investment. Essentially, if the dividends increase while the purchase price remains a fixed memory, YOC can make an aged investment look like the ageless Sophia Loren of your stock portfolio.
Illustrative Scenario: Imagine entering a party (the stock market) and hitting an all-you-can-eat buffet (dividend-paying stocks). You pay $20 for entry (purchase price) and come back every year, only to find that the buffet keeps getting grander, yet your entry fee remains a relic of the past. The enjoyment (dividend payment) derived relative to your historical cost rises, making you feel like an investment gourmet.
Key Takeaways
- Historical Insight: YOC provides insights based on the initial investment cost, offering a historical perspective of your returns.
- Growth Indicator: A rising YOC can indicate a robust dividend growth policy by the investee company, suggesting a potentially rewarding long-term hold.
- Comparative Caution: Be mindful that YOC isn’t directly comparable with current yields of other stocks, lest you compare an heirloom apple to a genetically-modified orange.
YOC in Action: Practical Understanding
To further clarify, let’s consider a hypothetical enthusiast, Emma Investment. Emma bought shares at $10 each 15 years ago with an initial dividend of $0.50 per share (a hypothetical current dividend yield of 5%). Over the years, as the company prospered and increased its dividends to $3.50 per share, Emma’s YOC ballooned to an impressive 35%. Meanwhile, the stock price soared to $50. If Emma were to focus solely on her YOC, she might overlook opportunities where newer investments could offer higher current yields or better growth prospects.
Critique and Strategy
YOC, while intoxicating with its high percentages, should not lead to inebriation. A high YOC might mask underlying issues like stagnating stock prices or faltering market positions. Astute investors use it as one of several tools, complementing it with analyses of company fundamentals, sector performance, and broader market trends.
Related Terms
- Dividend Yield: Percentage of a company’s price paid out as dividends each year.
- Current Dividend Yield: The yield calculated using the current stock price as opposed to the original purchase price.
- Capital Gains: Profit from the sale of property or an investment.
- Total Return: The overall return of an investment, combining dividends and capital gains.
Literary Recommendations
To deepen your knowledge pools about dividend investments and stock market foundations, consider the following tomes:
- “The Intelligent Investor” by Benjamin Graham - A masterpiece offering foundational investment wisdom.
- “Dividends Still Don’t Lie” by Kelley Wright - A guide to understanding and finding true value in dividend-paying stocks.
Understanding Yield on Cost helps in measuring the historical journey of one’s investments and can spice up investment conversations much like a well-aged wine at a party, but always remember to look beyond the glossy numbers.
