While not everyone agrees on the usefulness of knowing your dividend YOC, some investors like to calculate this number. Learn more about finding your dividend YOC and how it works.
Definition and Examples of Dividend Yield on Cost
Dividend YOC is the relationship between what an investment—such as a single company’s stock or an exchange-traded fund (ETF)—initially cost an investor and what it pays back in dividend income. Here’s an example. Let’s say you bought a stock for $100 per share 10 years ago. At the time, the stock had a dividend yield of 5%, so you would earn $5 per share in cash payouts just from holding the stock. After 10 years, the stock price doubles to $200. If the dividend yield is still 5%, the stock pays out $10 per share in annual dividends. However, your dividend YOC would be 10% because that $10 per share equals 10% of what you initially paid for the stock.
How Does Dividend Yield on Cost Work?
A dividend YOC works by calculating the percentage annual dividend yield in relation to the initial cost paid by an investor. This percentage differs from investor to investor; it depends on how much you bought the security for. A stock’s current dividend yield can easily be found through a brokerage platform or stock research site. That number refers to what the stock pays everyone in dividends relative to its share price. The dividend YOC, on the other hand, is likely something you’ll need to calculate. That’s because it’s different for everyone and doesn’t apply universally to all current investors. To find your dividend YOC, take the current yield and see what percentage that is of your initial investment. The current yield might be lower than when you initially made the purchase, such as if the dividend dropped from 5% per year to 3%. But, it’s possible that, if the stock’s price appreciated over time or you have more shares due to an event like a stock split, then your dividend YOC could be higher even though the yield percentage dropped. If you paid $100 per share initially with a 5% yield ($5) and the stock now trades for $200 per share, a 3% yield would result in $6 per share. So, that means your dividend YOC is 6%, which is more than the initial yield of 5%.
How To Use Dividend Yield on Cost
What does a dividend YOC tell you in practical terms? A 6% dividend YOC doesn’t change the fact that you might currently be earning a 3% yield based on present value, while perhaps another stock currently has a 4% yield. That’s why some investors and financial professionals do not focus too much on this metric. That said, a dividend YOC might give you a better sense of security when sticking with an investment long-term. Or, it might help you choose a stock over a bond. Let’s say you’re a risk-averse investor, and you see that you’re earning a 100% YOC. In other words, if you initially invested $1,000, you should earn $1,000 that year in dividend income, not to mention what you can get for the value of the shares themselves. That might make you feel more comfortable staying invested in the stock, rather than selling the security and holding onto just cash. Or, if you can see that you’ll earn back the principal amount you initially invested, plus more over time as you continue to earn dividends and the stock hopefully appreciates, you might feel more comfortable investing in a stock rather than a bond that pays a fixed yield.
