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.
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.