Definition of Yield On Cost (YOC)
When the annualized cash dividend received from a security is divided by its cost basis, it is called a Yield on Cost (YOC). It is similar to a dividend yield at the time of acquisition. If we keep a number of security shares constant along with going up cash dividend paid to the investor, the yield on cost will go up.
Explanation of Yield on Cost (YOC)
If 28 shares of Dover Corporation are purchased for $55.13 each, the cost will be $1543.64, and with a $7.95 commission, the total cost is $1551.59, or a cost basis of $55.41 per share. In mid-2012, the annualized cash dividend was $1.26 per share. The current yield and the yield-on-cost would be
If through reinvestment or purchases, more shares are bought, an average cost share for each basis can be calculated by simply adding up all owned shares.
Why it Matters?
Though yield on cost is relevant to individual investors but at times is disdained in favor of current dividend yield. That company in which dividends grow consistently can become a great investment for individual investors, who see their yield on cost increase as the dividend payout grows. A downside to yield on cost is that it can get confusing to calculate the original cost of shares if you are constantly reinvesting dividends as part of a dividend reinvestment plan (DRP or DRIP).