Yield on cost
The yield on cost tells you a company's dividend return as a percentage of the price that you paid for the shares.
The dividend yield of a share is fairly easy to understand. It is the current dividend per share divided by the current share price. So a company with a current dividend per share of 4p, and a share price of 100p, has a dividend yield of 4%.
If the company paying the dividend is successful, then its profits and dividends will grow over time. If the dividend grows by 5% per year for ten years, then it will have risen to 6.5p by the end of year ten. As a result, if you bought the shares at 100p ten years ago, then your yield on cost would now be 6.5% (6.5/100) in other words, it tells you the dividend return as a percentage of the price that you paid for the shares.
This measure is worth bearing in mind if you are investing for income. You might be able to buy a company bond that is paying an interest rate of 5% today, or you might be able to buy its shares with a dividend yield of 3.5%, which is expected to grow at 10% per year. The income from the bond is higher at first, but it will stay the same for the life of the bond.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
If you buy the share instead, you'll have a lower yield at first, but after four years of 10% dividend growth the share will be paying a higher income on cost than the bond (though this ignores the risk of disappointments).
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
-
8 of the best properties for sale near ski slopes
The best properties for sale near ski slopes – from a luxury cabin in Geilo, one of Norway’s premier ski resorts, to a large chalet in Valais, Switzerland
By Natasha Langan Published
-
Cash hoarders take total UK savings to £2 trillion – why aren’t we investing?
Investment-shy Brits are hoarding huge amounts of cash in their savings accounts. We look at the case for saving versus investing.
By Katie Williams Published