Thursday, February 23, 2012

Another look at yield-on-cost

The conventional definition of yield-on-cost (YOC)is to take the current annual dividend payment from a company and divide that by the original purchase price, rather than the current price, to determine the yield-on-cost. As a company raises it's dividend your yield-on-cost would rise whether the stock price goes up or down. It's a good way to look at the actual yield that you are receiving on your money rather than the current market determined amount for the current yield.

Another way to calculate it that I like to use just as a reference is the total annual payout that you would receive divided by the original investment amount. I like to call this the YOP. While this sounds the same what I do is factor in dividends that have already been reinvested and count the dividends that those shares payout as additional yield on the original investment. You can see the divergence in the following chart.



This isn't useful for determining future purchases but I do like to look at it this way since I consider the original investment as my only cost basis. It's good to see the YOP that I'm receiving and helps to reinforce the slow process that is dividend growth investing.

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