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How The Yield On Cost Can Be Misleading

Summary

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 yield on cost of nearly 7%. Your total rate of return would be 203%, equating an annualized gain of 25%. Not too shabby at all!

Amgen's consistent earnings growth leads to consistent dividend growth

Amgen's consistent earnings growth leads to consistent dividend growth

From the fiscal years 2011 to 2015, Amgen compounded its earnings per share by 18.1% per year and its dividend by 54.1% due to growing its earnings and expanding its payout ratio from 11% to 30%.

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 yield on cost of about 10.5%.

Your total rate of return would be 273%, equating 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.

TD Bank's earnings growth and dividend growth over time

Just like Amgen, Toronto-Dominion Bank's growing earnings over time has allowed its dividend to grow.

The earlier you invest in a quality dividend-growth company, the higher your yield on cost will be over time.

It's certainly impressive to tell others that you're sitting on a yield on cost of 50% (or any other big percentage) for an investment.

Coca-Cola example

For instance, if you bought Coca-Cola (NYSE:KO) at a split-adjusted price of $2.80 per share back in 1987, you would be sitting...


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