Yield On Cost

This metric is a dividend growth investor's best friend

February 13, 2023

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Now for today’s piece:

Yield On Cost

Yield On Cost

Highlights

If you only have a few minutes to spare, here’s what investors should know about the Yield On Cost metric:

 

• Yield On Cost is a measure of dividend yield relative to the original price paid for the stock.

 

• High-yielding stocks are more likely to cut their dividends and low-yielding stocks are more likely to grow them.

 

• The 3 best ways to maximize your Yield On Cost are to buy stocks in companies that grow their dividend, make sure the company is financially able to continue growing their dividend, and hold for the long term.

What Is Yield On Cost?

Yield On Cost (YOC) is a measure of dividend yield relative to the original price paid for the stock.

As a company grows its dividends over time, investors will enjoy a high Yield On Cost from their original investment.

This is not to be confused with Dividend Yield which is a measure of dividend yield relative to today’s stock price.

The Yield On Cost metric is a dividend growth investor’s best friend and we’ll dive into why:

Understanding Yield on Cost

Let’s say there’s a company trading on an exchange called Company ABC.

Today, Company ABC trades at $100 per share and pays an annual dividend of $5. Company ABC’s dividend yield would be 5% based on today's prices.

Now let’s travel back in time.

Say you bought 1 share of Company ABC while it was trading at $50 per share. Based on today’s dividend of $5, your yield on cost would be 10%.

This is yet another perk of growing dividends.

Your original $50 investment has not only doubled in value to $100. It’s also yielding 10% based on the amount you invested.

Original Investment = $50

Company ABC’s Current Dividend = $5

5 / 50 = 10% Yield On Cost

Importance of Yield on Cost in Investment Decisions

If you have the benefit of having years ahead of you to invest, you’ll most likely benefit from investing for Yield On Cost, rather than current Dividend Yield.

I made the mistake of prioritizing the current Dividend Yield when I started investing.

I looked at companies like Costco which yielded around 0.5% at the time and wondered, why would anyone buy a stock with that measly dividend yield?

Then I’d see stocks yielding 5, 6, 7% or more and thought, that’s where I want to be. I'll get a juicy payday there.

The irony is that high-yielding stocks are more likely to cut their dividends and low-yielding stocks are more likely to grow them.

And that’s where the money is: dividend growth.

Costco has grown its dividend by 12.59% over the last 10 years. If you bought 1 share 10 years ago at $98.37, your Yield On Cost today would be 3.66%.

And just this week we saw the (former) Dividend King Vanity Fair Corporation (NYSE: VFC) cut its dividend by 41%. Prior to the cut, VFC was yielding ~7.2%.

I’d be kicking myself right about now if I had bought VFC for the yield instead of Costco for the growth.

I’m happy I learned that dividend growth > dividend yield when you have a longer timeline to invest.

So as long as I have time on my side, I’ll be optimizing my portfolio for dividend growth to take advantage of Yield On Cost.

How to Maximize Yield on Cost

The 3 best ways to maximize your Yield On Cost are to:

  • Buy stocks in companies that grow their dividend

  • Make sure the company is financially able to continue growing their dividend

  • Hold for the long term to let dividend growth work its magic

By holding companies for the long term, you’ll be able to reap the benefits of compound interest and dividend raises. In turn, the Yield On Cost from your initial investment will grow.

Real-Life Examples of Yield on Cost

Here are some more examples of the Yield On Cost you’d be receiving if you bought these popular stocks 10 years ago:

Ticker Price Annual Dividend 10Y DGR YOC

JNJ $75.41 $4.52 6.37% 5.99%

V $38.69 $1.80 19.62% 4.65%

HD $67.45 $7.60 20.68% 11.26%

Final Thoughts

The Yield On Cost (YOC) metric is a dividend growth investor’s best friend.

It allows you to see what your original investment is yielding after years of dividend growth.

To take advantage of Yield On Cost, investors should look to buy stocks in companies that grow their dividends, make sure the company is financially able to continue growing, and hold for the long term.

I check my Yield On Cost periodically to remind myself of the power of dividend growth investing.

It’s pretty sweet to be able to watch the money you invested years ago have a higher yield all without you having to do anything.

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