What Is Yield On Cost And How Does It Work?

I’ve long preached that managing your personal finances and investing for the future isn’t rocket science. But I never said there wouldn’t be any math. Sometimes it really pays to crank up the calculator, put pencil to paper and run some figures.

Calculating a stock’s Yield on Cost (YOC) is a good example.

I’m big believer in income investing, which means buying assets that generate dividends, interest or other income. While you are saving, this income can be reinvested to turbocharge the growth of your portfolio. Once you retire, the income generated by your portfolio can be diverted into your bank account to help support your lifestyle.

When evaluating income stocks, individual investors often look at just current dividend yield. But we don’t buy income stocks just for the dividends. We expect the stock’s price to appreciate over time as well. A company that steadily grows dividends can be a great investment for individuals, as their YOC increases as the dividend payout grows.

YOC is easy to calculate. It’s the stock’s annual dividend divided by the original purchase price of the share.

LMT – IN 2007 LMT was around $100 a share and paying about $1.40 per share in annual dividends for a YOC of 1.4%. LMT has had significant dividend growth.  Today the company trades around $250 per share and pays $7.28 in annual dividends. That’s a decent yield in its own right. But take a look at your YOC. Your current dividend divided by what you originally paid. 7.28/100 = 7.28%.

Wow.

Never mind that the stock has also gone from $100 to $250 in 10 years, that’s a 150% return in itself. If you look at a total return with dividends included and reinvested, $1000 would have turned into $3500, or a 250% return or about 13.3% per year.

DISNEY traded at $30 per share in 2008 and paid 35 cents in dividends. Today, the Mouse hovers around$110 per share and pays $1.50 in annual dividends for a current yield of 1.4%.

But, let’s look at YOC. Disney’s current $1.50 dividend against a $30 per share price gives you a 5% yield from the 2008 price. Never mind that the stock has also gone from $30 to $110 in 9 years — a 265% return. If you look at a total return with dividends included and reinvested, $1000 invested in Disney in 2008 would have turned into $4130. That’s a 313% return or about 17% per year

IBM – In 2007, Big Blue traded around $95 per share with a $1.50 dividend. Today it’s about $180 with a $2.60 dividend. So, today’s yield is 1.4%, but YOC is 2.8%.

JNJ – The company paid a dividend of $1.62 in 2007 with a share price around $60. Today JNJ pays $3.20 a share and floats around $115 a share. Today’s current yield is only 2.84%. But the YOC is 5.3%. Total return from January 2007 to January 2017 is 130% or 8.7% per year. A $100,000 investment in JNJ would now be worth $230,000.

Imagine your original $100k investment sitting there and kicking out over 5k a year. That’s like having a rental property – without the maintenance costs or tenant headaches.

YOC should provide comfort in these turbulent times of record market highs and political uncertainty. When you start to pull the covers over your head and fear for the future, remember the long game of dividend income and dividend appreciation. Today’s 2% and 3% yielders are tomorrow’s 5% and 6%ers.

You have the math to prove it!

Check Out: The Shrinking Stock Market – How The Trend Of Merging Companies Impacts Investors

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