Yield on Cost

Yield on Cost (YOC) is a metric that measures the dividend income of a stock relative to the price originally paid for it, rather than the current market price. In simple terms, it answers the question:
“How much return am I earning on the investment I made, based on the dividends I currently receive?”

For Philippine investors, YOC is particularly useful for tracking the performance of long-term dividend holdings, as it highlights the growth of income relative to the initial investment rather than short-term price fluctuations.

How Yield on Cost Works

Yield on cost is calculated by dividing the current annual dividend per share by the original purchase price per share:

Current Annual Dividend per Share ÷ Original Purchase Price per Share = Yield on Cost

For example, suppose you purchased a stock listed on the Philippine Stock Exchange (PSE) for ₱20 per share five years ago. The company now pays an annual dividend of ₱2.00 per share. Your YOC would be:

₱2.00 ÷ ₱20 = 0.10 or 10%

Even if the stock’s current market price has risen to ₱30, the YOC focuses on the income relative to what you originally paid. This allows long-term investors to measure the actual growth in dividend income over their initial investment.

In the Philippines, yield on cost is particularly relevant for:

• Long-term investors who hold blue-chip stocks or REITs for income
• Dividend reinvestment strategies that compound income over time
• Retirement planning, where the focus is on actual cash received rather than market valuation

Many Philippine-listed companies, such as banks, utilities, holding companies, and REITs, have a history of increasing dividends over time. Yield on cost captures this compounding effect, showing investors how their dividend income grows relative to the original investment price, even if the stock price fluctuates.

YOC is also a motivational metric for investors who reinvest dividends: as dividends increase over time, YOC rises, reflecting the improved income-generating power of the initial capital.

Difference Between Yield on Cost and Current Dividend Yield

It is important to distinguish yield on cost from current dividend yield:

• Current Dividend Yield = Current annual dividend ÷ Current stock price
• Yield on Cost = Current annual dividend ÷ Original purchase price

Current yield reflects the income relative to the market price at any given moment, making it a snapshot of potential return if the stock were purchased today. YOC, on the other hand, shows the return based on the investor’s actual entry price, making it more personal and relevant for evaluating long-term investment outcomes.

For example, a stock purchased at ₱20 with a current dividend of ₱2 has a YOC of 10%. If the stock price rises to ₱30, the current yield drops to 6.67%, but the investor’s YOC remains 10%.

Key Considerations for Investors

YOC is most useful for:

1. Long-term dividend investors
2. Income-focused portfolios
3. Investors tracking dividend growth over many years

YOC is less useful for:

1. New investors evaluating potential purchases
2. Traders focused on total return or price appreciation
3. Comparing different stocks purchased at different times

Because YOC is based on a historical price, it should not be used to justify holding a poor investment if fundamentals have deteriorated.

While YOC provides a valuable perspective on the effectiveness of long-term dividend investments, it should be interpreted carefully:

• Does not account for capital gains: YOC focuses solely on dividend income and ignores potential stock price appreciation.
• Dividend sustainability matters: A high YOC is only meaningful if the company maintains or grows its dividend. Philippine investors must consider payout ratios, earnings consistency, and sector stability.
• Reinvestment potential: Investors who reinvest dividends may see effective yield on cost increase faster due to compounding.

YOC is therefore most useful in combination with other metrics, such as dividend growth rate, payout ratio, and total return, to provide a fuller picture of long-term income performance.

Common Questions About Yield on Cost

1. Does YOC change if the stock price rises?
   No. Yield on cost is based on the original purchase price, so short-term market fluctuations do not affect it.
2. Can a high YOC be misleading?
   Yes. A high YOC may reflect past dividend growth but does not guarantee future dividends. Investors should assess dividend sustainability and company fundamentals.
3. Is YOC useful for new investors?
   Less so. YOC is most relevant for long-term holdings where dividends have grown since purchase. New investors may focus more on current dividend yield to assess potential income today.
4. Does YOC include taxes?
   In the Philippine context, cash dividends are subject to a 10% final withholding tax. YOC calculations are usually expressed in gross terms, but investors should consider after-tax income when evaluating their actual returns.

Summary

Yield on cost is a personal and forward-looking metric for Philippine investors, emphasizing dividend growth relative to the original investment rather than market price. It highlights how long-term holdings and consistent dividend growth can improve the income-generating power of an initial capital outlay. When analyzed alongside dividend sustainability, payout ratios, and reinvestment strategies, YOC becomes a powerful tool for tracking the success of income-focused investment strategies in the Philippine market.