The yield on cost is a simple but effective financial calculation that shows the dividend yield of a shareholder’s investment. Often times, investors rely on the current yield of a stock, which is not very helpful for shares you may already own. The current yield is specific to the current share price as opposed to the average price share the investor purchased shares for in the past.
How to Calculate Yield on Cost
Calculating the yield on cost for stocks in your portfolio is not too difficult. An investor must divide the stock’s annual dividend by the average share price they paid. Take a look at the formula below.
YOC = Annual Dividend / Average Price per Share
Notice how the calculation above uses the average price instead of the current price per share, which is the different between the YOC and the dividend yield.
Calculating My Yield on Cost
Let’s take a look at an example of my current yield on cost for shares of Clorox (CLX) I own. Here are the first 5 purchases of CLX I made through the company’s direct stock purchase plan by making automated investments.
- .6855 shares @ $72.94
- .7760 shares @ $64.43
- .7272 shares @ $68.75
- .7359 shares @ $67.94
- .7816 shares @ $63.97
Each purchase was made with a $50 withdrawal taken directly from my checking account for 5 straight months. The purchase price ranged from $63.97 to $72.94.
The first step in my calculation is to find the average price paid per share of CLX. I already know that I have invested a total of $250 (5 purchases @ $50), so all I need to know is the number of shares I purchased. Adding up each fractional share I bought, I know own 3.7062 shares of Clorox.
My average price paid is $67.45 ($250 / 3.7062).
I also know that the most current annual dividend paid by the company is now $2.40. Taking my price paid and the annual dividend, I can quickly calculate my YOC.
YOC = $2.40 / $67.45 OR 3.56%
Analyzing the Numbers
At the time of this writing, the company had a dividend yield of 3.70%. This means that if I were to have purchased new shares of stock at that time, I would earn a 3.7% yield on my investment (based on the current dividend).
As you can tell, my YOC of 3.56% is lower than the current rate, which means my average price paid for the stock is higher than the current price. Over the long term, I expect my yield on cost to become higher than the current rate – provided the company continues to raise its distribution.
Do you use the YOC calculation to analyze your current holdings?
{ 1 trackback }