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Investors often evaluate the performance of their investments using various yield metrics. Two common measures are Yield on Cost (YOC) and Current Yield. Understanding how to calculate and interpret these metrics can help investors make informed decisions about buying, holding, or selling assets.
What is Yield on Cost (YOC)?
Yield on Cost (YOC) is a metric that shows the annual income generated by an investment as a percentage of the original purchase price. It indicates how well an investment is performing relative to its initial cost.
How to Calculate YOC
The formula for Yield on Cost is:
YOC = (Annual Income / Original Purchase Price) × 100
For example, if you bought a property for $200,000 and it generates $12,000 annually in rental income, the YOC is:
(12,000 / 200,000) × 100 = 6%
What is Current Yield?
Current Yield measures the annual income based on the current market value of the investment. It helps investors understand the income they receive relative to the current price of the asset.
How to Calculate Current Yield
The formula for Current Yield is:
Current Yield = (Annual Income / Current Market Price) × 100
Suppose the same property now has a market value of $220,000, and it still generates $12,000 annually. The current yield would be:
(12,000 / 220,000) × 100 ≈ 5.45%
Key Differences and When to Use Each
- Yield on Cost: Best for evaluating the performance of an investment relative to its original cost. Useful when considering the long-term value of a property or asset.
- Current Yield: Useful for assessing the income based on current market conditions. Ideal for comparing assets with fluctuating market values.
Both metrics provide valuable insights. Yield on Cost helps gauge how well an investment is performing over time, while Current Yield reflects current market realities. Investors should consider both when making decisions.
Conclusion
Calculating Yield on Cost and Current Yield allows investors to assess the profitability and market position of their investments. By understanding these metrics, investors can better strategize their portfolio management and optimize income streams.