Contents
1. Yield on Cost (YOC)
2. Understanding Yield on Cost (YOC)
3. Illustration of Yield on Cost (YOC)
Yield on Cost (YOC)
The yield on cost (YOC) is a measure of tip yield calculated by dividing a stock’s current tip by the price originally paid for that stock. For illustration, if an investor bought a stock five times ago for $20, and its current tip is $1.50 per share, also the YOC for that stock would be 7.5. YOC shouldn’t be confused with the term” current tip yield.” The ultimate refers to the tip payment divided by the stock’s current price, rather than the price at which it was originally bought.
- YOC is a measure of tip yield grounded on the original price paid for the investment.
- YOC can grow significantly over time if the company regularly increases its tip, so investing in tip growth is the way for long-term investors to maximize YOC.
- Investors using YOC should ensure they don’t compare it to other stocks’ current tip yields, as this is an apples-to-oranges comparison.
Understanding Yield on Cost (YOC)
YOC shows the tip yield associated with the original price paid for an investment. For that reason, stocks that have grown their tips over time can deliver veritably high YOCs, especially if the investor has held on to the stock numerous times. It isn’t unusual for long-term investors to enjoy stocks whose current tip payments are more advanced than the original price paid for the security, producing a YOC of 100 or lesser. YOC is calculated grounded on the original price paid for a security. thus, investors must make sure they keep track of the holding costs they’ve incurred for that security over time, as well as any fresh share purchases they’ve made. All of these costs should be included in the cost element of the YOC computation. else, the yield will appear unrealistically high. When assessing tip yields, investors must also be careful not to compare apples and oranges. Specifically, just because a stock’s YOC is more advanced than the current tip yield of another company, it doesn’t mean that the stock with the advanced YOC is inescapably the better investment. That’s because the company with the high YOC may have a lower current tip yield than other companies. In these situations, the investor could be better off dealing their shares in the high YOC company and investing the proceeds in a company with an advanced current tip yield.
Illustration of Yield on Cost (YOC)
Emma is a retiree who’s reviewing her pension’s investment returns. Her portfolio includes a large position in XYZ Corporation, which her portfolio director bought 15 times ago for $10/ share. When it was bought, XYZ had a current tip yield of 5 grounded on a tip of $0.50 per share. In each of the 15 times that followed, XYZ raised its tip by $0.20 per time. It’s anticipated to pay $3.50 per share this time. Its stock price has risen to$ 50 per share, performing in a YOC of 35 ($3.50 divided by the original $10/ share purchase price) and a current tip 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 time. Looking over the most recent report from her portfolio director, she was thus shocked to find that they had vended the XYZ position. The director reinvested the proceeds in ABC diligence, a company with analogous fiscal strength as XYZ, but with a current yield of 8.50. Frustrated by this putatively foolish decision, Emma calls her portfolio director. She asks why they vended a position yielding 35 in exchange for one yielding only 8.50. The portfolio director explains to Emma that she has made a common mistake. Rather than comparing YOC to the current tip yield, she should make an apples-to-apples comparison between both companies’ current tip yields. From this perspective, switching to ABC was maybe a wise choice because it offered an advanced yield on her plutocrat 8.50 versus 7. Still, the two companies’ tip growth prospects are more important if Emma wants to continue adding the yield on cost.
