# Understanding Yield on Cost (YOC) for Dividend Investments

## What Is Yield on Cost (YOC)?

Yield on cost (YOC) is a measure of [dividend yield](https://www.investopedia.com/terms/d/dividendyield.asp) 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 [current dividend yield](https://www.investopedia.com/terms/c/currentyield.asp), which is calculated by dividing the dividend payment by the stock's current price. YOC is used to assess the profitability of investments in the past, while current dividend yield can be used to compare investment opportunities in the present.

### Key Takeaways

*   Yield on Cost (YOC) measures dividend yield based on the initial purchase price, not the current stock price, allowing investors to understand the return on their original investment over time.  
    
*   YOC highlights the benefits of dividend growth, as stocks that increase dividends over time can lead to significantly higher yields compared to their purchase price.  
    
*   Comparing YOC with current dividend yields can be misleading; it's essential to consider the growth potential of dividends rather than just the percentage yield.  
    
*   Long-term investors may achieve a YOC over 100% when the dividends received surpass the original investment cost, a situation not possible with fixed-income securities like bonds.  
    
*   Evaluating investments requires looking at factors such as dividend growth prospects and overall portfolio strategy rather than focusing solely on YOC or current yield.

## How Yield on Cost (YOC) Works

 YOC shows the dividend yield based on the initial investment price. Stocks that increase dividends over time can achieve high YOCs, especially for [long-term investors](https://www.investopedia.com/articles/00/082100.asp). It's common for their dividend payments to exceed the original purchase price, resulting in a YOC of 100% or more.

YOC is based on the initial purchase price. Investors should track any holding costs and additional share purchases over time. These must be included in the YOC calculation, or else the yield might appear too high.

When looking at dividend yields, avoid comparing apples to oranges. A stock with a higher YOC isn't always a better investment than a company with a lower YOC. The high YOC stock may actually have a lower current dividend yield.

 In such cases, an investor might benefit from selling shares in a high YOC company and investing in one with a higher current dividend yield.

> **Important**
>
> YOC highlights the long-term benefits of stocks over bonds. Bonds offer fixed interest rates and not growing dividends, making their long-term potential lower.

## Example: Yield on Cost (YOC) in Action

Emma is a retiree who is reviewing her pension's investment returns. Her portfolio includes a large position in XYZ Corporation, which her [portfolio manager](https://www.investopedia.com/terms/p/portfoliomanager.asp) purchased 15 years ago for $10/share. When it was purchased, XYZ had a current dividend yield of 5% based on a dividend of $0.50 per share.

In each of the 15 years that followed, XYZ raised its dividend by $0.20 per year. It is expected to pay $3.50 per share this year. Its stock price has risen to $50 per share, resulting in a YOC of 35% ($3.50 divided by the initial $10/share purchase price) and a current dividend yield of 7% ($3.50 divided by the current $50 share price).

Emma considers XYZ to have been one of her most successful investments. She takes satisfaction out of seeing the lofty YOC that it produces every year. Looking over the most recent report from her portfolio manager, she was therefore shocked to find that they had sold the XYZ position. The manager reinvested the proceeds in ABC Industries, a company with similar financial strength as XYZ, but with a current yield of 8.50%. Dismayed by this seemingly foolish decision, Emma calls her portfolio manager. She asks why they sold a position yielding 35% in exchange for one yielding only 8.50%.

The portfolio manager explains to Emma that she has made a common mistake. Rather than comparing YOC to the current dividend yield, she should make an apples-to-apples comparison between both companies' current dividend yields. From this perspective, switching to ABC was perhaps a wise choice because it offered a higher yield on her money—8.50% versus 7%. However, the two companies' [dividend growth](https://www.investopedia.com/articles/basics/04/072304.asp) prospects are more important if Emma wants to continue increasing the yield on cost.