Defining Yield on Cost (The YOC!)

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!

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!

Conclusion

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.

-Lanny

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28 thoughts on “Defining Yield on Cost (The YOC!)

  1. Thanks for the easy to read/understand explanation! As a new investor, wanting to focus on dividends/passive income with little to no background in investing, it is very helpful to find a post, let alone a blog, such as this. Your and Bert’s knowledge both together and separate is very insightful and inspiring.

    I do not currently monitor YOC but will have to start doing so in a Google Sheet somewhere — it would definitely be interesting to see as my portfolio ages.

    Thanks,
    Alex

    • Alex,

      No problem boss! I’m glad we can shed light on investing topics, dividend investing, the stock market, what we use to screen stocks and the like – I hope it has helped you start it up!

      Google sheets are great – can pick it up on any device, edit, make changes, etc.. Fairly easy to set up the YOC, keep us posted if you do!

      Thanks again for stopping by and don’t hesitate to shoot us a message if you ever have investing ?’s!

      -Lanny

  2. I like looking at YOC as well. Great way to see how dividends compound with time.

    By the way, your comment box seems to think my typical user name “Adam @ AdamChudy.com” is spam.

    • Adam,

      Agreed, I think it’s a fun tool for my best reason haha, to show the growth and dividend compounding.

      Does it really come up like that? I’ll see what I can do with our spam filters – thanks for pointing that out. We are actually working on a few tweaks on our blog coming shortly, we’ll keep you and everyone posted on that.

      Thanks again for stopping by Adam, talk soon.

      -Lanny

  3. Thanks for the post Lanny. I believe YOC is an important metric. As a buy and hold investor, to truly appreciate dividend growth stocks, we have to hold as long as we can on quality stocks. Years later, we will thank ourselves and reap the benefits of a much higher yield comparable to low quality riskier plays all because of time in the markets. Wouldn’t it be awesome to own Johnson and Johnson with a yield on cost of 10% 🙂
    Thanks for your time and keep up the good fight my friend. Have a nice weekend Lanny!

    • Hustler,

      I think we actually will get with JNJ, no lie my man! May take a little bit longer; say 7-10 years, but it’ll have a YOC of 10%, you watch! haha In all seriousness – you’re right, buy quality stocks. Buy more when you can and watch the yoc increase, as the projected income goes up, not rocket science, you know?

      Always appreciate the stop – have a great rest of the week as well DH, talk soon.

      -Lanny

  4. Well explained Lanny! I don’t automatically track YOC (no monthly dividend income report and no YOC tracking, I must be a real bad div investor! LOL), but I must admit it’s an interesting metric when in doubts, like reinvesting for example.

    Cheers,

    Mike

    • Mike,

      You’re really slipping over there, huh? Are you the dividend guy or are you just a guy who wants to start some arguments with the DGInvestors? Joking haha, I kid of course.

      But of course – a lot of things impact the yoc, reinvesting being one of them. Wonder what your spreadsheet looks like that you track your portfolio on sometimes! haha. Talk soon DG.

      -Lanny

      • Hey Lanny,
        hahaha! I just like to be different 😉 that’s all!
        I look at my portfolio statement provided by my online broker. It tells me pretty much what I need to know: how much my portfolio worth! hahaha!
        One day, I’ll need my dividend to live and I’ll track them, in the meantime, I track the company’s report and make sure they increase their payout and they post solid earnings. For example, I know APPL just increased its dividend by 11%. I don’t need to know how much I’ll receive in $ next quarter.

        I must admit I still like the YOC just because it shows the power of dividend growth over time. Cheers,
        Mike

        • DG,

          Being different is what it’s about sometimes – so all good there.

          The YOC is a true story, really shows the strength behind it. My Pfizer I bought in 2010 now yields over 9% for me, but then there is my ATT which the YOC is at 5.82%; not too much higher than it’s current yield.. haha. It’s interesting.
          Of course, the name “the YOC” probably either looks really odd or really cool, all depends, funny, right?

          -Lanny

  5. Diplomats,

    I appreciate this article a lot. I’ve seen some phrase and some poo-poo YOC, but I like it. I don’t like to measure it at a more than annual level (considering that is how most companies increase), but it is still a useful tool to see how $1000 invested 1-30 years ago is working for me today.

    Thanks,
    Gremlin

    • DG,

      Thanks for the post – and you’re right, not something to really focus on at an indepth level, but really cool to see the power of reinvesting and dividend growth over time, it’s a fun little item to see in the stock spreadsheet, for sure.

      Thanks again Gremlin – talk soon buddy!

      -Lanny

  6. Thanks for this exposé on YOC. I think a lot of people don’t track it, at least many UK investing people I follow have never really mentioned it.

    Cheers

    • M,

      Thanks for coming by, glad you enjoyed it and hopefully it was another topic, form that you haven’t seen and that it may help? Have some fun with it! Thanks again for stopping on by.

      -Lanny

  7. This is why we are dividend growth investors. It’s never about current yield as much as dividend growth and yield on cost for long term investors. I talk to my friends all the time about investments and buying dividend stocks and quite honestly they can never get passed the fact or excited about a stock that yields 2%. I explain that over time with dividend growth that 2% stock can be yielding 10% or more over a long term holding period with dividend growth. I think this ‘secret sauce’ of dividend investing is often lost on many potential investors. Thanks for sharing.

    • DivHut,

      Exactly! It’s all about time, compounding and the yield on cost over that time will be phenomenal.

      Very secret sauce. Majority of people think very short-term and don’t look at true value from a company and understand true “business” or guts behind how they make money. YOC is definitely a good way, to show that overtime a valuable company yields much more than face value… ya know?

      Thanks again for the support DH, as always!

      -Lanny

  8. Great article. This is actually something I’ve been struggling with – whether or not to add the reinvested dividend to the cost basis (thus potentially lowering your yoc if you purchase the stock at a higher price than the original investment). I was leaning towards counting it because you could have used that divvy for anything, like purchasing a different stock or buying groceries. Now you’ve got me thinking again…

    • Ken,

      Thanks for coming by this post. Hope the post helps you conclude on a decision you may have! I think the reinvestment is part of an overall return for a stock, in my eyes, but maybe in others eyes it is different. If you can – let us know what you end up deciding on and it can help us/community poll what investors see DRIP as. Thanks again Ken, talks soon!

      -Lanny

      • Thanks, Lanny. I’m still on the fence. Let me present this question to you. Say you receive a $100 dividend from JNJ. Instead of automatically reinvesting the cash in JNJ, you decide to purchase two shares of MSFT. The cost of this purchase plus commissions is exactly $100. Would you consider your cost basis for this new MSFT position to be $0 since the capital came from dividends? This is my dilemma since I plan on encountering this scenario in the future and I want to treat all of my positions the same way. Thanks in advance.

        • The $100 you spent on MSFT increases the cost basis of your MSFT position by $100. Money is fungible; it doesn’t matter if it came from dividend income, your salary or a Christmas present.

          Let me say it this way: If you had $200 in your cash account then you received the $100 dividend and then bought the $100 worth of MSFT; you still have $200 in your account. Are the 200 dollars you’re left with exactly the same 200 dollars that you started with? Maybe the bank shuffled some around and you actually spent some of your initial money instead? It really doesn’t matter; instead be happy that you were able to buy an additional $100 worth of stock on top of your regular income and look forward to even higher dividend income going forward.
          Best wishes,
          -DL

          • Thanks DL

            I couldn’t agree with you more. I personally believe that reinvested dividends, whether a DRIP into the same stock or the purchase of a new stock, should be added to the cost basis. But you are correct that it doesn’t matter (except for tax purposes) – no matter what method you use you are still increasing wealth and dividend income. I summarized my position on this topic in my recent post. I would love to get your feedback.

            Thanks, Ken

          • Loving this. It’s interesting. In the end = hey more stock/investments to be had from dividends/income/cash coming from assets you own.

            However.. there is an item we aren’t considering – we pay taxes on these dividends (if in an individual account) – therefore, there’s that piece we need to think about, right?

  9. Hi Lanny,
    I must admit I don’t pay any attention to YOC, although I’ve calculated it in the past out of interest. Annualized dividend growth rate over a period of time is a more useful substitute for me and it allows direct comparison of any two stocks without regard to when I bought them.

    The points you’ve made for YOC are good though; I’m for any tool or metric that encourages and builds enthusiasm for saving!

    I’m curious how you handle additional purchases over time. Say you bought a stock 10 years ago for $1000 and it has a YOC of 215% (or a 10% annualized growth). Today you purchase another $1000 of stock. What’s the new YOC – did it just halve? I’m thinking it’s a meaningless calculation since $1000 from 10 years ago is a totally different monetary value from $1000 now?

    Best wishes,
    -DL

    • DL,

      In that situation… I think you would have a cost basis of $2,000 total – but ultimately depends on the share price you just paid. Say if you bought 100 shares for $1000 and then you bought 1 share for $1,000, so now you own 101 shares for $2,000 – that would have to be the new cost basis, all else/things remaining equal, no?

      -Lanny

  10. Hi Lanny,

    Great article! I must admit YOC is not one of the usual metric in my spreadsheet. But after reading your article I did some homework 😉

    I calculated the YOC for my Vrijheid Fonds. The weighted YOC at this moment is 4.18%
    Just must bear in mind that I just rearranged my portfolio last year.

    But for RDS, which I own for 10 years now, I calculated the initial YOC (4%) and the YOC today (7.84%).
    And thats feels good. The eight wonder of the world!

    Keep up the Good Work

    Cheers,
    Pollie

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