What is Yield On Cost ?

1149 reads · Last updated: December 5, 2024

Yield on cost (YOC) is a measure of dividend yield calculated by dividing a stock's current dividend by the price initially paid for that stock. For example, if an investor purchased a stock five years ago for $20, and its current dividend is $1.50 per share, then the YOC for that stock would be 7.5%.YOC should not be confused with the term "current dividend yield." The latter refers to the dividend payment divided by the stock's current price, rather than the price at which it was initially purchased.

Definition

Cost yield is a measure of dividend yield calculated by dividing the current dividend of a stock by the price at which the stock was originally purchased. It helps investors understand the return on their investment based on the initial purchase price.

Origin

The concept of cost yield originated from investors' focus on long-term investment returns, especially when dividend income becomes a significant part of investment returns. As the stock market evolved, investors began to pay more attention to the actual value of dividend income rather than just stock price fluctuations.

Categories and Features

Cost yield is primarily used in long-term investment analysis, particularly for investors focusing on dividend income. Its characteristic is that it calculates yield based on the initial investment cost rather than the current market price, making it more valuable for evaluating the returns of long-held stocks. Compared to current dividend yield, cost yield better reflects the actual returns for investors.

Case Studies

Case 1: Suppose an investor purchased shares of ABC Company in 2010 at $10 per share, and the company currently pays a dividend of $0.80 per share. The cost yield is 8%, indicating a relatively high return on the initial investment. Case 2: XYZ Company was purchased in 2015 at $50 per share and currently pays a dividend of $2 per share. The cost yield is 4%, showing a stable return on this investment.

Common Issues

Investors often confuse cost yield with current dividend yield. Cost yield is based on the original purchase price, while current dividend yield is based on the current market price. Additionally, cost yield may lose some of its reference value due to changes in market conditions, especially when stock prices fluctuate significantly.

Suggested for You

Hurdle Rate

The Hurdle Rate, also known as the Minimum Acceptable Rate of Return (MARR) or Required Rate of Return (RRR), is the minimum rate of return on an investment project that a company or investor is willing to accept before proceeding with the investment. This rate is set by the company's management or investors and serves as a benchmark for evaluating the feasibility of investment projects. The hurdle rate takes into account the cost of capital, risk premium, and other factors to ensure that the investment yields sufficient returns to compensate for the risks involved. If the expected return on a project is below the hurdle rate, the project is typically rejected. The hurdle rate is crucial in capital budgeting and project evaluation, aiding companies in effective resource allocation and risk management.

Horizontal Spread

A Horizontal Spread, also known as a Time Spread or Calendar Spread, is an options trading strategy. This strategy involves simultaneously buying and selling options contracts with the same strike price but different expiration dates. Typically, a trader will buy a long-term option and sell a short-term option. The goal of a horizontal spread is to profit from the difference in time value, especially when the underlying asset's price is not expected to move significantly. By employing this strategy, traders can benefit from the different rates of time decay (the reduction in the value of an option as it approaches its expiration date). Horizontal spreads are suitable for investors who have an expectation of market volatility but are uncertain about the specific direction of the price movement.

Box Spread

A box spread, or long box, is an options arbitrage strategy that combines buying a bull call spread with a matching bear put spread. A box spread can be thought of as two vertical spreads that each has the same strike prices and expiration dates.Box spreads are used for borrowing or lending at implied rates that are more favorable than a trader going to their prime broker, clearing firm, or bank. Because the price of a box at its expiration will always be the distance between the strikes involved (e.g., a 100-pt box might utilize the 25 and 125 strikes and would be worth $100 at expiration), the price paid for today can be thought of as that of a zero-coupon bond. The lower the initial cost of the box, the higher its implied interest rate. This concept is known as a synthetic loan.

Equity Fund

An equity fund is an investment vehicle that pools money from many investors to be managed by professional fund managers, primarily investing in the stock market. The goal of an equity fund is to achieve capital appreciation by investing in various companies' stocks. Depending on the investment strategy and objectives, equity funds can be classified into actively managed equity funds and passively managed equity funds. Actively managed equity funds involve fund managers actively selecting and adjusting the stock portfolio to achieve returns that exceed the market average. Passively managed equity funds typically track a specific stock index, such as the S&P 500, aiming to replicate the performance of that index.

Stock Dividend

A stock dividend is a payment made by a corporation to its shareholders in the form of additional shares, rather than cash. When a company earns a profit, it may choose to distribute part of it to shareholders by issuing new shares. Each shareholder receives a proportionate number of additional shares based on their existing holdings. The issuance of stock dividends does not alter the total market value of the company but increases the total number of shares outstanding, thereby diluting earnings per share. Stock dividends are typically used when a company wants to retain cash for reinvestment or other purposes while still providing a return to shareholders.

Stock Split

A stock split is a corporate action in which a company increases the number of its outstanding shares by issuing more shares to current shareholders, thereby reducing the price per share. A stock split does not change the company's overall market capitalization or the total value of a shareholder's holdings; it merely reduces the price per share while increasing the number of shares held by each shareholder. For example, in a 2-for-1 stock split, each share held by a shareholder is split into two shares, and the price of each share is halved. Stock splits are typically undertaken when a company's share price has become relatively high, making the shares more affordable and attractive to investors.