Yield on cost is a meaningless number whose sole purpose is to make you feel good. Nothing wrong with that, EXCEPT when you get fooled into treating your yield on cost as meaningful and start to make decisions based on it.
I disabused myself on it a while back, when I was shifting some dividend-paying stocks from a taxable account to an IRA, by selling it from the taxable and simultaneously buying it in the IRA.
Say I had originally paid $20 at $1 dividend (5% yield) and it had grown to $40 at $2 dividend. So my yield-on-cost is now 10%.
But wait....a flurry of paperwork and the shares have moved from one account to another. Am I still getting 10% YOC in the new account? When computing the YOC, do I use the original cost as what I paid long ago in the old account, or what I paid for the exact same number of shares in the exact same stock in the new account?
That mental exercise convinced me that YOC has no concrete reality, that it's just a bogus computation comparing numbers from two different points in time. You can divide today's price by today's dividend, or you can divide yesterday's price by yesterday's dividend---but you can't divide today's price by yesterday's dividend.
Anyway, the whole thing is a fallacy. Companies don't pay dividends in "yield". What companies pay is dividends in dollars.
I disabused myself on it a while back, when I was shifting some dividend-paying stocks from a taxable account to an IRA, by selling it from the taxable and simultaneously buying it in the IRA.
Say I had originally paid $20 at $1 dividend (5% yield) and it had grown to $40 at $2 dividend. So my yield-on-cost is now 10%.
But wait....a flurry of paperwork and the shares have moved from one account to another. Am I still getting 10% YOC in the new account? When computing the YOC, do I use the original cost as what I paid long ago in the old account, or what I paid for the exact same number of shares in the exact same stock in the new account?
That mental exercise convinced me that YOC has no concrete reality, that it's just a bogus computation comparing numbers from two different points in time. You can divide today's price by today's dividend, or you can divide yesterday's price by yesterday's dividend---but you can't divide today's price by yesterday's dividend.
Anyway, the whole thing is a fallacy. Companies don't pay dividends in "yield". What companies pay is dividends in dollars.
