We all know that by normal convention, yield is calculated as the annual dividend/coupon/interest amount divided by the current price of the security, which is current yield. However, some investors, instead of using current price, used the entry price as the denominator. This is also known as yield on cost. They would prefer to look at this version of yield as they wanted to know the returns based on their initial investment amount.
For example, a person bought Company A’s shares at $1.00 a few years ago. Fast forward to the present day, the share price had risen to $1.50. If the current year dividend was $0.15, the “normal convention” would be $0.15/$1.50 = 10%, but to him/her who uses yield on cost, it would be $0.15/$1.00 = 15%.
Do note that for yield on cost, we would have to take in ...
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