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?