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What is Yield on Cost and Should You Care About it?

Yield on Cost (YOC) is a popular metric among dividend investors. YOC is calculated by dividing the current yearly dividend by the price you paid per share and multiplying by 100. So if I purchased a stock 10 years ago for $20/share and this year the stock pays $1.50 in dividends per share, my YOC would be 7.5%.

Many dividend investors have a goal of holding a stock until the YOC reaches a certain level, as if there’s some bragging rights associated with having a YOC greater than 10%, or whatever threshold sounds impressive to you.

I find YOC to be a completely arbitrary figure that has no relevance whatsoever when it comes to assessing your portfolio or your self worth.

If the stock that you bought 10 years ago for $20/share doubled in price and is now $40/share, the current yield is 3.75%. That sounds a lot less impressive than 7.5%, but guess what? However you slice it, the stock still pays $1.50 per share. You’ve just found a new way to present that data to make it sound more impressive. And if you manage to get your YOC over 100% (meaning you earn more in dividends each year than you initially invested in the stock), I’m sure that feels good, but the problem is, it doesn’t mean anything other than that you’ve probably held the stock for a very long time.

If you’re holding a stock that has a current yield of 3.75% with a YOC of 7.5%, and another stock has a current yield of 4%, pulling your money out of the first stock and putting it into the second stock will earn you more in dividends, despite that sweet-sounding 7.5% YOC.

The only argument I’ve heard for caring about YOC that even remotely makes sense to me is that it forces you to have a long-term view of your investments. Having a goal to get your YOC up to a certain level may give you the psychological boost you need to hold onto your investments during economic down turns. If watching your YOC grow over the years is a fun game that helps you stick to your guns and leave your investments alone, carry on!

The other argument I’ve seen is that if your YOC is growing, it’s an indicator that the company is increasing its dividends, and therefore an indicator that you chose to invest in a solid company. The price you paid for the stock is a constant, so the only variable affecting your YOC is the current dividend. If the current dividend stays the same, your YOC will stay the same. If it goes up, your YOC will go up. For investors who focus on YOC, they may set a goal that their investments will generate a certain YOC in a certain number of years. If a stock fails to reach the desired YOC in the desired time frame, the investor may choose to sell it. That sounds great and all, except for one little issue. We already have a metric to measure dividend growth. It’s called (can you guess?) the dividend growth rate. Most dividend investors already screen potential investments for their five year dividend growth rate and continue to monitor the dividend growth of the investments they hold. So why do you also need YOC?

Other dividend investors out there, help me out here! Do you look at YOC? If so, what information does it give you that helps you make decisions about your investments?

12 Responses to What is Yield on Cost and Should You Care About it?

  1. I would agree that the YOC is a bit arbitrary and I really don’t look at it at all. I have a few dividend payers, but not a whole lot. I’ve shifted a bit out of them lately with all the love that’s be shown to them.

    • Gen Y Finance Journey

      I’ve heard people worrying about investing in dividend stocks with their current popularity. I feel that as long as I invest in companies that have a long history of increasing their dividends, it’s still a good investment. I’d be wary of high dividend yields that don’t seem to be sustainable.

  2. YOC is something I’ve never paid much attention to with my dividend stocks. I don’t care so much about looking back as I do about the companys prospects for increasing the dividend regularly and having good overall performance going forward.

    • Gen Y Finance Journey

      Well I think past performance and a history of increased dividends is an important consideration, but you can get that information without relying on YOC.

  3. YOC seems to ignore inflation. Sure 100% YOC might seem great, but as you said you probably have had the stock for decades. How much has inflation taken out of your gain?
    Dividend stocks are great, but I never thought about looking at them like this.

    • Gen Y Finance Journey

      I’m glad these comments confirm that I’m not missing some important implication of YOC that makes it a worthwhile metric to look at. It can be fun to measure, but I think fun is about all it’s good for.

  4. It’s funny — if most people spend as much time working on ways to save money as they do with the minute details of their investing, their finances would likely be so much better off (I just don’t think that saving money is as ‘sexy” as investing in most people’s minds — as can been seen when people talk at gatherings)

    • Gen Y Finance Journey

      Very true. People do tend to spend more time and energy on the things they find interesting. Unfortunately, the things they find interesting aren’t always the most useful place to put their time and energy. And certainly not when they spend that time concocting various metrics that don’t actually tell you anything.

  5. I don’t have any dividend stocks, but when I do (oh, and I WILL someday), mostly I just want to know; How much cash money can I bank from these investments. YOC seems like a fancy statistic that people like to tout in order to justify how long they’ve held a stock, which doesn’t seem to matter as far as bottom line goes.

    • Gen Y Finance Journey

      I don’t have a huge portfolio of dividend stocks, but I enjoy dreaming about the day I’ll have enough that the dividends can pay for most or all of my expenses. Like you, I just focus on how much money the stocks pay me in dividends and whether it’s likely that they will continue to pay me more and more as time goes on, because really that’s all that matters.

  6. Interesting topic! Since I’m not a dividend investor and probably won’t be for some time, I haven’t really thought much about it. I also pray that people do not find their self worth in their YOC! What a terrible thought.

    • Gen Y Finance Journey

      Hopefully I was exaggerating! I have seen some people write about YOC as if it’s something they’re really proud of, which I just don’t understand.

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