Caution: The Yield on Cost is Misleading

Why is the yield on cost a “feel good” metric? What does buying at the right valuation have to do with company quality and the yield on cost? What’s more important than tracking the yield on cost?

For periods of time, the yield on cost (“YOC”) has been used as one of the favorite metrics in the Dividend sections of Seeking Alpha. However, it can be misleading.

How do you use the yield on cost metric?

A common usage of yield on cost is to illustrate how a quality company has consistently increased its dividend over time. I acknowledge that the YOC is great for showcasing that.

Amgen example

If you invested in Amgen (NASDAQ:AMGN) five years ago, you would have started with a yield of almost 2% and would be sitting on a YOC of nearly 7%. Your total rate of return would be 203%, equating an annualized gain of 25%.

From the FY2011 to 2015, Amgen compounded its EPS by 18.1% per year and its dividend by 54.1% due to growing its earnings and expanding its payout ratio.

Toronto-Dominion Bank example

If you were Canadian, and you invested in Toronto-Dominion Bank (TSX:TD)(NYSE:TD) in 2000, you would have started with a yield of about 2.7% and would be sitting on a YOC of about 10.5%.

Your total rate of return would be 273%, or an annualized gain of 8.6%. This doesn’t seem outstanding compared to what an investment in Amgen have achieved in five years, but the returns still more than doubled that of the S&P 500 returns in that period.

This is primarily an excerpt from my article on Seeking Alpha. Read the full article here: How The Yield On Cost Can Be Misleading

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Disclosure: At the time of writing, I own shares in Amgen and TD.

Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

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One thought on “Caution: The Yield on Cost is Misleading

  1. Ken K

    I only use YOC two ways. First as a measuring stick towards my long term goals. For me, every dollar I invest today needs to have a YOC of 10%-12% 12 years down the road.

    The second method is YOC is part of a calculation that compares capital gain to YOC. If my capital gain growth is 4x or greater than my dividend growth then it may signal an opportunity to sell and reinvest in a company with better dividend growth potential and make even more annual income.

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