Definition of Yield on Cost (YOC)
Yield on Cost (YOC) is a financial metric used to evaluate the dividend yield of an investment, specifically calculated by dividing the stock’s current annual dividend by the price initially paid for that stock. This gives investors a clearer picture of the return on their investment based on their purchase price rather than the current market price.
Formula for Yield on Cost (YOC):
\[ YOC = \left( \frac{\text{Current Dividend}}{\text{Original Purchase Price}} \right) \times 100 \]
Yield on Cost vs Current Dividend Yield
| Criteria | Yield on Cost (YOC) | Current Dividend Yield |
|---|---|---|
| Calculation | Based on original purchase price | Based on current stock price |
| Purpose | Evaluates return based on historical investment | Evaluates current market performance |
| Relevance | More meaningful for long-term investors | Useful for assessing immediate income |
| Impact of Dividends | Increases with rising dividends | Remains static unless dividends change |
Example
Consider an investor who bought XYZ stock for $20 five years ago, and now this stock pays a dividend of $1.50 per share:
- YOC Calculation: \[ YOC = \left( \frac{1.50}{20} \right) \times 100 = 7.5% \]
Related Terms
- Current Dividend Yield: The dividend payment divided by the current stock price.
- Dividend Growth Rate: The annualized percentage rate of growth of a company’s dividend over time.
- Total Return: The overall return on an investment, including capital gains and dividends.
graph LR
A[Yield on Cost (YOC)] --> B{Key Factors}
B --> C[Original Purchase Price]
B --> D[Current Dividend]
C -->|Low Price, High Dividend| E{High YOC}
D -->|Increased Dividends| E
E --> F[Attractive for Long Term Investors]
Fun Quotes & Insights
- “Investing is like a marriage. YOC is that ‘I still love you for your old self’ feeling in dividends.” 💍
- Did you know? If you consistently reinvest dividends, you can turn a small investment into a fortune over time—after all, compounding is a formidable ally!
- Historical Fact: The concept of dividend investing dates back to the 19th century when companies began formalizing the way they shared profits with their shareholders.
Frequently Asked Questions
1. What is the importance of Yield on Cost?
Yield on Cost provides a measure of an investment’s performance that considers the original price paid, making it useful for long-term value assessments.
2. Can I compare YOC across different stocks?
No! It’s like comparing apples to oranges—YOC is based on an original purchase price, while current yields use current market prices.
3. How can I improve my yield on cost?
Investing in companies with a history of raising their dividends can help boost your YOC over time.
4. What role does a company’s growth play in YOC?
Consistent dividend growth can significantly enhance your YOC, providing a hedge against inflation.
5. Is YOC relevant for brief trading strategies?
Not particularly, as YOC is more suited for long-term investments focused on dividends rather than short-term stock price movements.
References
- Investopedia: Yield on Cost
- The Intelligent Investor by Benjamin Graham
- Dividend Growth Stocks: Your Best Weapon Against Inflation by Mark S. Milston
Test Your Knowledge: Yield on Cost Quiz
Thank you for diving into the delightful depths of Yield on Cost with us! Remember, investing wisely can lead to financial independence and perhaps some oceanfront property in your future—just as soon as you can YOC!
Keep smiling while you invest!😊
