Yield on Cost (YOC)
Contents
Unveiling the Concept of Yield on Cost (YOC)
Exploring Yield on Cost (YOC)
Understanding the intricacies of Yield on Cost (YOC) is essential for investors seeking to maximize returns on their investments. This article delves into the definition of YOC, its significance, and how it can be leveraged by investors for long-term wealth accumulation.
Deciphering Yield on Cost
Yield on Cost (YOC) is a metric used to evaluate the dividend yield of an investment relative to its initial cost. By dividing the current dividend by the price initially paid for the investment, investors can gauge the effectiveness of their investment strategy over time. YOC reflects the dividend yield associated with the original purchase price, providing valuable insights into the long-term performance of an investment.
Understanding the Dynamics of YOC
YOC can grow substantially over time, especially for investments in companies that regularly increase their dividends. As dividends increase, the YOC of the investment also rises, showcasing the compounding effect of dividend growth. However, it is crucial for investors to accurately track their holding costs and consider all additional share purchases when calculating YOC to ensure realistic and meaningful comparisons.
Illustrative Example of YOC
Consider Emma, a retiree, who holds shares in XYZ Corporation purchased 15 years ago. Despite XYZ's impressive YOC of 35%, her portfolio manager decides to sell the position and invest in ABC Industries, offering a lower YOC of 8.50%. Emma learns the importance of comparing YOC to current dividend yields and assessing dividend growth prospects for maximizing long-term returns.