What it means
Two investors can own the same share and report different yields on cost because they bought at different prices. If both now receive a dividend of $2 per share, one who paid $20 has a 10% yield on cost and one who paid $40 has 5%.
For a dividend investment, define the annual dividend being used, since an announced future payment, the last twelve months of dividends and an annualised latest payment can differ. Adjustments to cost can matter, because transaction fees, later purchases, reinvested dividends, stock splits and returns of capital can change a meaningful per-share basis.
In real estate development, a common version divides expected stabilised net operating income by total project cost. Total cost can include land, construction and other specified expenditures.
Stabilised income is a forecast, not cash already received. A new building may take time to reach expected occupancy and rent.
Construction delays, incentives, operating costs and financing can make realised outcomes diverge from a model. Compare a development yield on cost with a market capitalisation rate cautiously.
The spread may suggest potential development value, but the cap rate applies to a differently measured asset and market. Historical cost is useful for tracking an investment journey, but for a hold-or-sell decision the current value and alternative uses of that value matter more than a flattering old denominator.
If a warehouse cost $2 million and now earns $240,000 of net operating income, its yield on original cost is 12%. At a current value of $5 million, the same income is only 4.8% of that value.
A high yield on cost can result from income growth or a low historic purchase price, so check tenant strength for property and the payer's ability to sustain dividends for shares. For owners, use the metric with current yield, total return, cash needs and risk.
Date the income estimate and document the cost basis. Compare consistent income definitions.
In practice
Real-world examples.
Example
An investor bought shares at $20 ten years ago. The company now pays $2 per share, giving a 10% yield on cost.
Example
A developer spends $30 million building an office block that earns $2.4 million in net rent a year, a yield on cost of 8%.
Example
A landlord bought an apartment for $800,000 that now earns $64,000 a year in net rent, an 8% yield on cost.
Formula
Calculation
Yield on cost = Defined annual income / Defined historical cost x 100. For shares, use current annual dividend per share and adjusted purchase cost per share; for a property project, use projected stabilised net operating income and total defined project cost.
Worked example. An invented developer expects stabilised annual net operating income of $2,400,000 after a $30,000,000 total project cost. The forecast yield on cost is $2,400,000 / $30,000,000 x 100 = 8%. This is a project estimate, not cash-on-cash return to equity investors.
Separately, an investor paid $40,000 for shares now paying annual dividends of $3,200. Yield on cost is $3,200 / $40,000 x 100 = 8%. If those shares are worth $80,000 today, their current dividend yield is $3,200 / $80,000 x 100 = 4%, before fees and taxes.Case study
Seen in the real world.
This illustrative and entirely fictional example follows Omar, an invented warehouse owner. He bought a property for $2,000,000. The building now produces $240,000 of annual net operating income under his stated definition, making yield on original cost 12%. A broker estimates that the property could sell for $5,000,000, which makes current income equal to 4.8% of estimated value.
Omar considers another investment advertised at 7%, but checks its vacancy risk, fees and whether the income forecast is realistic. He does not assume the larger current yield makes selling obviously right. He also reviews deferred maintenance and the tax and transaction cost of a sale. If repairs reduce current net income, both yield comparisons need updating.
The investment decision depends on future cash, risk and available alternatives. Omar keeps the historic 12% figure as a record of what happened after his purchase. For a new decision, he uses current valuation and net proceeds as well.
Watch out
Common mistakes.
- Using historical cost yield alone to decide whether to hold or sell.
- Leaving out development costs or mixing gross rent with net operating income.
- Presenting projected stabilized income as guaranteed current cash.
Questions
People also ask.
What is the difference between yield on cost and dividend yield?
Current dividend yield uses the share price today. Yield on cost uses the investor historical purchase-cost basis.
Why do developers use yield on cost?
It compares forecast stabilized net operating income with total defined project cost to test the project economics.
Is a high yield on cost always good?
Not necessarily. It may reflect an old low cost, while current value, risk and future income tell a different story.
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