Dividend Strategy5 分钟阅读

The Illusion of Yield on Cost (YoC)

Have you ever been pleased that the dividend yield on a stock you bought years ago had somehow become 9% or 20%? But is that number really the yield you are actually receiving right now?

What Is YoC, and Why Does It Look So Big?

YoC (Yield on Cost) means the dividend yield relative to your purchase price. The formula is very simple.

YoC = (annual dividend ÷ the price I first bought at) × 100

For example, if you bought a stock at about $30 and it now pays about $1.80 a year in dividends, the YoC is 6% ($1.80 ÷ $30).

The key point is that the denominator is fixed at "the price I bought at." The "current dividend yield" we commonly see uses today's stock price as the denominator, but YoC uses the old purchase price as is.

So when a company raises its dividend every year, the denominator (purchase price) stays the same while only the numerator (dividend) grows, so the YoC number gets larger and larger. No matter how much the stock price rises or falls, YoC does not budge. It moves only when the dividend changes.

Sources for the definition and formula: Finance Strategists, Savings Grove. The example figures ($30 purchase, $1.80 annual dividend → 6%) are a standard illustration; the original used a $40 purchase and $2.40 dividend → 6%.

Buffett's Coca-Cola: This Is What Happens When Dividends Grow

The most famous case of why YoC looks attractive is Warren Buffett's Coca-Cola.

Buffett bought Coca-Cola in large quantities in the early 1990s, and the dividend yield at the time of purchase is said to have been fairly ordinary, roughly 1.6–1.7%. But as Coca-Cola raised its dividend every year for more than 60 years, his "dividend yield based on purchase price (YoC)" has historically risen to roughly the 20% level, several outlets report.

In other words, someone who initially put in about $740 and received about $12 a year ended up, decades later, receiving about $148 a year on that same principal. This is exactly the power of "dividend growth," and YoC is the metric that makes that growth visible.

However, the total investment amount and the exact YoC number differ slightly from source to source depending on the calculation basis and the year, so it is best to understand these only as "roughly."

The Buffett Coca-Cola case is an educational example to explain the concept of dividend growth. It is not a recommendation of any specific stock, and the total investment amount varies by source (roughly $1.3 billion to $4.1 billion, etc.), so it is noted as "roughly."

But Here Is Where the Illusion Begins

It feels good when the YoC number grows, but there is a big trap here. YoC is not "the yield I am actually receiving now."

Let's look at a real case, the Canadian telecom BCE. Suppose a stock bought at $30 in 2010 is now $63, and its annual dividend is $2.73.

YoC = 2.73 ÷ 30 = 9.1% Current yield = 2.73 ÷ 63 = 4.3%

Why so different for the same dividend ($2.73)? Because the amount of my money actually "tied up" right now is not the $30 purchase price, but the $63 I would receive if I sold today.

In other words, since I am effectively holding $63 worth in this stock and receiving $2.73, my true yield is 4.3%. The 9.1% is just a "record" calculated with an old price, not today's report card.

Source for the BCE example: The Globe and Mail (John Heinzl). The YoC of 9.1% vs. current yield of 4.3% based on a $30 purchase, $63 current price, and $2.73 dividend was confirmed identically across two or more search results.

The Real Mistake the Illusion Creates

The reason the YoC illusion is dangerous is that it clouds "judgment."

A typical thought is: "My YoC is 9%, and other stocks yield only 4%, so I won't sell." But this is comparing apples and oranges. If you base it on the $63 you would receive if you sold now, your actual yield is also 4.3%, so it is not much different from another asset yielding 4%.

Another thing: looking only at YoC makes it easy to miss "dividend cut risk." Even if the company's earnings worsen and it cuts the dividend, the memory of the glamorous YoC of the past few years can make you ignore the warning signs.

To sum up, YoC is excellent as a backward-looking metric for reflecting on "how well this investment has grown its dividends in the past." But when deciding "should I keep this money here or move it," you must always recalculate using the "current yield" based on the current stock price.

The criticism that YoC is a backward-looking metric is commonly pointed out by many investment-education outlets. This article does not recommend any specific trade; it only explains the principle of how to make judgments.

常见问题

Q. Between YoC and current dividend yield, which should I look at?

Both have different uses. YoC is a report card for reflecting on "how well my investment has grown its dividends over time." Conversely, when judging "should I keep this money here," you should look at the "current dividend yield" calculated using the current stock price. Even if YoC is 20%, the real yield as of today can be far lower.

Q. So is YoC a useless metric?

No. It is good for motivation in that it visibly shows the power of dividend growth. If you hold a good dividend-growth company for a long time, there is satisfaction in watching how YoC swells. You just have to avoid mistaking that number for your "current yield."

Q. If the stock price halves, does YoC fall too?

No. The denominator of YoC is fixed at "the price I bought at," so no matter how sharply the price drops, YoC stays the same. This is exactly the cause of the illusion. So during a price decline, it is important to make a habit of checking the maximum drawdown and the loss duration together, not only YoC.