Yield on cost
Current annual dividend ÷ your original purchase price. If you bought at ₦20 and the company now pays ₦4/year, your yield on cost is 20% — locked in for as long as you hold.
Yield on cost is a simple yet powerful concept for Nigerian retail investors, especially those venturing into the Nigerian Stock Exchange (NGX). Imagine you decide to invest in a company that pays dividends. The yield on cost helps you understand how much return you're getting relative to the amount you initially invested. For example, if you bought shares at ₦20 each and the company pays ₦4 in dividends annually, your yield on cost is 20%. This means that for every ₦100 you invested, you're earning ₦20 back in dividends each year.
This metric is particularly useful because it provides a clear picture of your investment's performance, regardless of the stock's current market price. It's like buying a loaf of bread for ₦200 and getting a ₦50 voucher every year—you're getting a consistent return on your initial investment. Even if the price of the bread fluctuates in the market, your yield on cost remains a reliable indicator of your return.
In the Nigerian context, where the Central Bank of Nigeria (CBN) often sets the Monetary Policy Rate (MPR) at around 27.50%, investors are always looking for better returns. Yield on cost helps compare your stock investments against traditional savings instruments like Treasury Bills (T-bills), which also offer fixed returns. By calculating the yield on cost, you can see if your stock investments are beating these fixed-income options.
Understanding yield on cost becomes even more critical when considering taxes. In Nigeria, there is a 10% Withholding Tax (WHT) on dividends and a 10% Capital Gains Tax (CGT) on profits from selling shares. Knowing your yield on cost helps you factor in these taxes and understand the net return on your investment. If your yield on cost is 20%, but you have to pay 10% in taxes, your effective return is 10%. This clarity can help you make more informed investment decisions.
Why it matters: Understanding yield on cost allows Nigerian investors to assess the true performance of their investments. It helps you compare different investment options, such as stocks versus T-bills, and make better-informed decisions. By keeping track of your yield on cost, you can ensure that your investments are working hard for you, even in a fluctuating market.