Yield on Cost is a fantastic metric that can be used to judge the success of an investment in a dividend-paying stock. It’s simply calculated by dividing a stock’s current dividend rate by the amount paid for it.
http://dynamicdividend.com/glossary/yield-on-cost/
For example, let’s say that in 2005 I paid $50 for a stock that carried a dividend rate of $1. I was buying a stock with a dividend yield of 2%, which isn’t exceptional by any means, but I liked the company’s dividend growth prospects.
Fast forward to today. The stock is now trading at $100 a share, and the company’s board of directors has increased its dividend rate to $5 over the years. So the stock can now be purchased with a 5% dividend yield, much better than before. Obviously I have made some nice capital gains by the share price doubling, but what kind of return am I getting on my original investment via dividends these days? That’s where yield on cost comes in.
Taking the stock’s current dividend rate of $5 and dividing it by the $50 I paid for each share, I get 0.10 (or 10%). My yield on cost is 10%, which means I can expect a 10% annual return on my original investment via dividends.
By making a savvy purchase of a stock poised for dividend growth, I am now earning a very high yield on my original investment.
The Dynamic Dividend Glossary
- Average Daily Trading Volume (ADTV)
- Beta
- Coverage Universe
- Dividend
- Dividend Achievers
- Dividend Aristocrats
- Dividend Rate
- Dividend Yield
- Ex-Dividend Date
- Payout Ratio
- Special Dividend
- Volume
- Yield on Cost
