As a dividend investor, there are several financial ratios I have come to learn and use in my stock analysis. For example, the dividend payout ratio tells me how much of a company’s earnings are going to pay their dividend. The dividend yield lets us know how much return on investment an investor would receive in dividends based on the current share price.
The financial ratios listed above are all great tools in narrowing down stock picks. However, there is another formula that can tell your actual dividend return for shares you have already purchased called the yield on cost (YOC). Let’s take a closer look at my yield on cost analysis of a stock in my portfolio – Abbott Laboratories.
Yield on Cost Analysis – Abbot Laboratories
At the time of this writing, Abbot Laboratories offered a dividend return of 3.50% for investors willing to purchase shares at $54.86. With an annual dividend of $1.92 and a member of the 2012 dividend aristocrat index, ABT is a good candidate for any income portfolio.
As a stock holder of ABT for several years, I have benefited from this companies strong dividend history. I was also fortunate enough to purchase shares of this stock well below the current price per share. This means that based on the current payout, my return is actually higher for shares I already owned compared to investors purchasing shares right now.
In order to calculate my true return on investment, I need to calculate my yield on cost for the shares I bought years ago. Here is a snapshot of the stock I originally purchased.
- Total Investment – $971.95
- Shares Purchased – 20
- Original Purchase Price – $48.60
If I were to purchase 20 additional shares of stock today, I would end up paying $1,097.20 instead of $971.95. The dividend yield is at 3.50% and is based on the current share price, so I need to look at my average price per share I paid to figure out my true dividend return.
Before I figure this out, I also need to factor in any DRIP shares that have been added to my portfolio along the way. Remember that most brokers will let you reinvest your dividends back into fractional shares of stock, which will help you build your position quicker.
- DRIP Shares – 1.133
The past couple of years I have been able to pick up an additional 1.133 shares by reinvesting my dividend payments. Since I did not pay any additional capital to but this stock, my average price per share is actually lower.
- Total Investment – $971.95
- Shares Owned – 21.133
- Average Price per Share – $45.99
Based on my average price per share, my actual yield on cost would equal 4.17% instead of the current return of 3.50%.
The Importance of Calculating Your Yield on Cost
As you can tell from the calculations above, the yield on cost is important for dividend investors to understand. I can compare the yield on shares that I own for all the stocks in my portfolio. This helps me determine if a stock is a candidate to be sold or in some cases, a signal to add to my position.
I should see continuous increases in yield for each of my holdings every year. If I am not actively buying shares of a stock, then my yield on cost better be increasing or it may be time to sell!
Do you calculate the yield on cost for your holdings?