Pin It

How to Calculate the Yield on Cost for Stocks that Pay Dividends

pfincome | May 12, 2010 |

0 Comments | Rating: 0

An important calculation often used on stocks that pay dividends is referred to as the Yield On Cost (YOC). The YOC will tell an investor what dividend yield they are earning on their investment based on how much was invested. In contrast, a stocks dividend yield (can be found on most financial websites) represents the dividend return on the current share price. The YOC will always vary from investor to investor, while the dividend yield will be the same for all shareholders.

The dividend yield and YOC can both provided critical data to investors. Since each calculation is easy to perform, there is no reason why an investor cannot have this information in front of them in a matter of minutes. For those interested in learning more about calculating a stocks YOC can follow the formula below.

The YOC takes the current 12-month dividend payout divided by the average purchase price of an investment. Investors who have made multiple purchases of the same stock must first calculate the average price paid for the stock. This average is often well below the current share price, although can be above in some situations depending on when the stock was purchased.

Using the fictitious data below, an investor can calculate the YOC and dividend yield.

Yield On Cost Calculation

Average Share Price - $25
Current Share Price - $50
Current Annual Dividend - $1.50

Current Dividend Yield = ($1.50/$50) or 3.0%
Yield On Cost = ($1.50/$25) or 6.0%

In the above example, new investors to the stock would be earning 3.0% in dividend yield if they purchased the stock at $50. However, a long term dividend investor would be earning 6.0% based on their original purchase price. This shows the effectiveness of investing in the best stocks that pay dividends that raise their distributions annually.

An investor can also find that they may not be earning as much on an investment as someone new to the stock. The example below shows a YOC calculation that is not as good as the current dividend yield.

Lower Yield On Cost Calculation

Average Share Price - $60
Current Share Price - $50
Current Annual Dividend - $1.50

Current Dividend Yield = ($1.50/$50) or 3.0%
Yield On Cost = ($1.50/$60) or 2.5%

In the example above, new investors purchasing the stock at a cheaper price are finding their dollars earning more than older investors. This can be an important calculation for an investor weighing the options of exiting a position or not.

Final Thoughts

The dividend yield and the yield on cost are important ratios used by investors. The dividend yield takes into account the current share price versus the dividend payout over the past 12-months. The yield on cost calculates the average share price paid for a stock versus the dividend payout for the past 12-months.

These two ratios can be used to help investors make decisions about dollar cost averaging down in the stock, selling the entire position, or remaining constant. The Yield On Cost calculation also provides important information to an investor to see just how much return on investment they are earning. Since every calculation is different for each investor, it is critical to run and analyze this data.