This post will be an investing lesson regarding a certain investing topic that dividend investors will occasionally use when they discuss performance and metrics. It is similar to your yield and is a huge proponent for how long you hold onto an investment, the activities that happen within that investment, as well as the pros and cons of measuring such a metric. The topic that I’d like to discuss today is the Yield on Cost or, as I like to call it – The YOC! And no… this is not the same thing as in the NFL or YAC (Yards after catch), close though! Let’s talk about The YOC!
Yield on Cost or The YOC, as we’ll call it, is an investing metric that, more specifically, dividend investors use when talking about a stock that they own. The YOC tracks your yield on the initial cost of your investment. Want an example? Sure, let’s do it.
Say you buy Johnson & Johnson (JNJ), as I recently have done, and you spent $1,000 on the investment for 10 shares at $100 per share. The initial yield and initial YOC was $2.80 per share or 2.80% overall. JNJ, though, announced a dividend increase to $3.00 per share. The stock price jumps from $100 to $110 per share and your investment is now worth $1,100. Your current yield at $30 in dividends per year over $1,100 is 2.72%. However, your YOC is calculated differently. Your cost didn’t change, but the dividend did. You now receive $30 on the initial cost of $1,000, which your YOC goes from 2.80% to 3.00%.
Do you see that change/track measurement there? Over time as a dividend growth/income investor – this is the traditional path that one would see.
What Impacts The YOC?
There are a few items that impact your yield on cost that I will list out below. Fairly simple, but here we go:
- Dividend Increases – as discussed above, this will tremendously effect your yield on cost or YOC. Anytime a company raises their dividend, boom, YOC goes up and your initial cost into an investment now produces more cash for you.
- As a dividend can increase, a dividend can also decrease – this would obviously decrease your YOC – you don’t want that.
- More Shares through Dividend Reinvestment (DRIP) – I count the reinvested shares in my DRIP not as a cost but as an overall return. Say, for example, I own 1 share or $1,000 of a stock trading at $1,000 it gives me a dividend of $1. Say the market value stayed the same and I reinvested that dividend – my cost remains at $1,000 and my market value went to $1,001 and your shares increase to 1.001. That’s the way that I look at it, as I count on DRIP to the overall return expectation to my stock that I own as opposed to increasing the cost basis. With this – your YOC goes up, actually, as your cost stayed the same but your projected income or yield is higher due to owning more shares or a $1’s more worth of shares. Make sense?
- Simply buying more stock – if you continue to average down on a position, your YOC should be changing as well with those purchases or even buying at any price, for that matter.
Why care about The YOC?
This appears to be the real debate or pressure. Why do you care about the Yield on Cost or YOC? This is why I care about the YOC:
- It shows if your investment is performing well overtime, especially from a dividend investor standpoint. You ultimately should see your YOC higher than your current yield, as this would show appreciation, reinvestment and dividend growth from your original investment. All positives here.
- It’s a sign of what direction you want your portfolio to go. Say for instance – you’ve been investing and your current yield is approximately the same as your YOC – it could help then with investment decisions, such as – should you look for other stocks that have more value or potentially even selling that individual stock? From looking at my overall portfolio at end of day 4/28, my Yield is 3.75% and my YOC is 5.03%, and on an individual taxable account level my yield and YOC are 3.82% and 4.80%, respectively. From there, you can see I’ve had a lot of the positives happen to the portfolio and my investments have moved in the right direction. I’d wonder what happened if I was at 3.75% for current yield and my YOC was at 3.75%.
- It’s fun. It shows me that a single $ I invested back in, for example, 2010 for Lockheed Martin now yields me 10.24 cents or 10.24%. Not bad, right? Thank goodness for strong dividend growth rates!
Your YOC is not by any means an important metric to look at, but a tool to see what trend a stock or portfolio is or has been heading. It can be fun to monitor and is a simple field to calculate within excel. There are a lot of positives to looking at it, I feel, in helping you make your decision to currently hold, sell or buy more of a stock. There are better metrics to look at, easily, such as our stock screener tool, the 5 year dividend yield comparison and even the share buy back figure – to see performance, valuations and directions of where a stock could be heading.
How many of you monitor the yield on cost? Do you find it to be an annoying column in your spreadsheet? Have you had it, then disposed of the tool? Any feedback, thoughts, suggestions or comments are appreciated! Thanks everyone, talk soon.