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”Yield on cost” is a popular investment ratio. It refers to current dividends expressed as a percentage of the price paid for a stock, at some time in the past. As I'll show today, yield on cost is at best irrelevant, and at worst leads to poor investment decisions.
If a company increases its dividend after you purchased shares, you will enjoy a higher rate of income return on your original investment your yield on cost rises. Dividend investors like tracking the yield on cost of their holdings to see the power of consistent dividend growth.
Yield on Cost (YOU) is a measure of dividend yield calculated by dividing a stock's current dividend by the price initially paid for that stock.
Yield-on-Cost. Yield-on-cost is the net operating income (or sometimes cash flow from operations) at stabilization divided by the total project cost, whereas the capitalization rate (cap rate) is the stabilized net operating income (or sometimes cash flow from operations) divided by the market value of the property.
The average dividend yield in the sector as a whole is 2.22%, while the average consumer goods yield for stocks listed in the S&P is 2.5%. The highest yielding industry within this sector is the cigarette industry, which is well known for its high yields.
While the dividend rate refers to how much per share in dividends an investor receives, the dividend yield refers to the yearly dividend rate divided by the current share price.
The importance is relative and specific to each investor. If you only care about identifying which stocks have performed better over a period of time, the total return is more important than the dividend yield. If you are relying on your investments to provide consistent income, the dividend yield is more important.
A good dividend yield will vary with interest rates and general market conditions, but typically a yield of 4 to 6 percent is considered quite good. A lower yield may not be enough justification for investors to buy a stock just for the dividend income.
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