What is YOC (Yield on Cost)?
Yield on Cost (YOC) Definition
It is different from the dividend yield, which is taken by dividing the current dividend payment by the current share price.
Example of Yield on Cost
For long-term investors, YOC is a figure that may change drastically over time.
For example, an investor may purchase stock in Company A at $10 per share, with dividend payments of $0.50 per share.
Here, the YOC and dividend yield are equal, at 5%.
However, say that over the next 20 years, Company A adds $0.10 in dividend payments per year, but increases their share price to $50.
After 20 years, the dividends will reach $2.50 per share.
The dividend yield will still be 5%, but the investor’s YOC will be 25%
How Yield on Cost Can Mislead Investors
Yield on cost has been criticised as a metric that holds little relevance, and may even mislead investors.
For example, it does not provide an accurate representation of the current benefit of investing in a stock, only the benefit that would have been realized had an investor bought the stock in the past.
YOC also ignores the effects of inflation, which may bloat the figure but not represent any actual gain in value.
YOC also ignores any additional costs incurred since the purchase of the stock, such as if the investor had reinvested any dividends back into their stock.
Some investors may also be reticent to sell their high YOC shares and buy stocks with a higher dividend yield, mistakenly believing that a high YOC indicates better performance.