Yield On Cost VS Yield On Market Value: Which Should Dividend Investors Rely On?

Dividend investing often feels simple - buy solid companies, collect steady income, and enjoy financial freedom one dividend at a time.  However when it comes to measuring how well your portfolio is performing, it may not be so straightforward.  One of the most debated questions among dividend investors is should one evaluate one's portfolio based on yield on cost (YOC) or yield on market value (YOMV)?  Both metrics tell a story about your income, but they tell different stories, and depending on your goal, one may matter more than the other.

Understanding the Two Metrics

1)     Yield on Cost (YOC)

Yield on Cost = Annual Dividends per Share ÷ Purchase Price per Share

YOC measures how much dividend income one receive each year relative to the price one originally paid for the stock.  For example, if a dividend investor bought a stock at SGD 10 and it now pays SGD 1 in annual dividends, the YOC is 10%.  Even if the stock has risen to SGD 20 today, the YOC remains at 10%.  

YOC is a personalized measure.  It reflects the reward one is getting on the original investment, a way to track how one's dividend income has grown over time.

2)     Yield on Market Value (YOMV)

Yield on Market Value = Annual Dividends per Share ÷ Current Share Price

This shows the yield that the market currently offers.  If the same stock now trades at SGD 20 and still pays a SGD 1 dividend, the YOMV is 5%.  

YOMV reflects current reality, what new investors would get if they bought the stock now, and what the existing capital is currently yielding if one were to reallocate or sell.

Why Yield on Cost Appeals to Long-Term Dividend Investors

YOC is emotionally satisfying because it rewards patience and consistency.  It shows the power of dividend growth and time in the market.

For example, a long-term investor in DBS who bought during 2020’s market lows might now enjoy a YOC of over 8 to 10%, while the YOMV is only about 4 to 5%.  The rising YOC reflects dividend hikes and the compounding effect of holding quality businesses through cycles.

It reinforces the mindset that:

a)     Dividend growth investing works over time.

b)     Investors are earning more on the same original capital.

c)     Selling may not be necessary since investors are already enjoying a growing passive income stream.

For retirees or FIRE investors focusing on income sustainability, YOC indicates how far one's investments have come in funding your lifestyle.

Why Yield on Market Value Is the More Objective Measure

While YOC boosts morale, it can be misleading if used to measure performance or compare investments.

YOMV, on the other hand, is forward-looking and market-based.  It is an indication of:

a)     How efficiently your capital is working today.

b)     Whether one's portfolio remains attractive compared to alternatives (e.g., REITs, T-bills, CPF SA interest).

c)     How much one could earn if one reinvested elsewhere.

For instance, suppose an old holding within the portfolio gave an investor a 10% YOC.  However if that stock’s price has stagnated and the dividend is flat for years with a YOMV of 3%, the market may be signaling limited future growth.  Meanwhile, other opportunities may offer 6% current yield with higher growth potential.  In other words, YOC looks backward, but YOMV is forward-looking.

The Hidden Trap of Over-Focusing on Yield on Cost

Many dividend investors proudly say “My YOC is 10% or 15%", or "My stocks are essentially freehold and YOC is now infinite".  However, this mindset can lead to anchoring bias, including the tendency to hold on to underperforming stocks simply because they look great on paper relative to your original cost.

Contrary to this belief, the truth is capital does not care where it came from, what matters is only where it is going next.  If the capital could earn more elsewhere with similar or lower risk, the high YOC becomes irrelevant because investors are no longer maximizing their portfolio’s current income potential.

The Dividend Investor’s Compass

Ultimately, YOC is a motivational metric, while YOMV is a management metric.  As a avid dividend investor, use YOC to celebrate your progress because it reminds you how patience and dividend growth pay off.  On the other hand, use YOMV to guide your decisions as it tells you how efficiently your money works today.

A disciplined dividend investor finds satisfaction in both: the emotional reward of long-term growth, and the rational clarity of capital efficiency.

In dividend investing, the goal is not solely to chase the highest yield.  Instead it is to build a growing, sustainable, and efficient income stream.  YOC tells you how far you have come.  YOMV tells you where you stand today.  Both are part of the same compass.  For me personally, my YOC is 7.3%, while my YOMV is only 4.4% as of end of October.  This indicates that I am doing something right, and my portfolio is generally performing relatively well in terms of capital gains as portfolio value has increased at a faster pace than dividend growth.  However, this may also be a indication for the need to do some rebalancing within my portfolio to enhance its income-generating potential.  I will try to work around the numbers and hopefully progress towards a 5% YOMV, or just keeping my fingers crossed to hope for a recovery in REITs' distributions.  Barista FIRE, here I come...!