Boring Terms We Need To Know: Yield On Cost

In order to analyze dividend stocks we need to understand some boring statistical terms. Since I'm going to use these terms a lot, I thought it would be best for me to explain them one at a time.  Although these terms initially may sound complicated, I think you'll find they're not that difficult at all to comprehend.

The first term we'll discuss is one that you'll hear me talk about quite a bit when referring to my own portfolio, Yield on Cost (YOC).

If you're ever at a party and you hear someone bragging about the Yield on Cost of their portfolio then you'll know they are a dividend investor (and you're probably at a boring party... or my house).

Yield on Cost is simply the annual dividend rate divided by what you paid for the investment.  Each time your dividend increases, so does your Yield on Cost.

Still confused?  Lets do a real-world example that will clear things up.  To keep it simple in this example, we are not reinvesting dividends (shame on us!).

Let's say we bought 100 shares of McDonald's (MCD) 11 years ago for $30.00 / share. At that time McDonald's was paying a yearly dividend of $0.215 / share.   In Year 1 our YOC is the same thing as our dividend yield, so in 2000 MCD had a measly dividend yield of (0.215 / 30.00) = 0.73%.  Now lets see how the dividend and our YOC grew from there.

Year	Yearly Dividend	YOC Formula Dividend / Original share price	YOC	Yearly Dividend Payment
2000	$0.22	0.22 / 30	0.73%	$22.00
2001	$0.23	0.23 / 30	0.77%	$23.00
2002	$0.24	0.24 / 30	0.80%	$24.00
2003	$0.40	0.40 / 30	1.33%	$40.00
2004	$0.55	0.55 / 30	1.83%	$55.00
2005	$0.67	0.67 / 30	2.23%	$67.00
2006	$1.00	1.00 / 30	3.33%	$100.00
2007	$1.50	1.50 / 30	5%	$150.00
2008	$1.63	1.63 / 30	5.43%	$163.00
2009	$2.05	2.05 / 30	6.83%	$205.00
2010	$2.26	2.26 / 30	7.53%	$226.00
2011	$2.53	2.53 / 30	8.43%	$253.00

So what did we learn?  Well for one thing McDonald's has had some impressive dividend growth in the last 11 years.  But the main thing to take from this is that, although we were only getting a 0.73% dividend yield when we first bought the stock, thanks to that impressive dividend growth we are now enjoying an 8.43% Yield on Cost.  That's a nice return on investment (just in dividends) each year that also has a great chance of increasing again next year.

Disclosure: I do not own MCD