Freedom Isn’t Free UK Personal Finance
Investing
Is Yield on Cost a Useful Metric?
A 20% yield on cost feels like investing genius. The dividend doesn't care what you paid in 2008. The metric most income investors brag about has a flattering lie buried inside it.
Yield on cost vs current yield
| Scenario | Price you paid | Price today | Dividend per share | Yield on cost | Current yield |
|---|---|---|---|---|---|
| Held since launch | £10 | £50 | £2 | 20% | 4% |
| Sold and rebought today | £50 | £50 | £2 | 4% | 4% |
| Same shares in HYSA at 4% | £50 (mkt value) | £50 | £2 | n/a | 4% |
Yield on cost answers what your money already earned. Current yield answers what it will earn next.
Key takeaways
1
Yield on cost compares your current dividend income to the original price you paid for the stock.
2
Critics argue that yield on cost can distort investment decisions because it is based on a historical price.
3
Yield on cost does not reflect the current economic reality of your investment.
4
It is important to consider opportunity cost when evaluating investments.