Yield on Cost

Yield on cost measures the dividend yield you receive based on the original price you paid for a share. It is popular among dividend investors because it shows how much income a position now produces compared with the capital invested at the start.

Unlike current dividend yield, which uses today's market price, yield on cost uses your purchase price. That means it answers a different question: how much annual dividend income is my original investment producing now?

Yield on cost formula

The basic formula is:

Yield on cost = annual dividend per share / purchase price per share

If you bought a share at 40 and the company pays 1.20 per share in annual dividends, your initial yield on cost is:

1.20 / 40 = 3%

If, several years later, the dividend rises to 2.00 per share, your yield on cost becomes:

2.00 / 40 = 5%

Your yield on cost has increased because the company now pays more dividend income on the same original purchase price.

Difference from current dividend yield

Current dividend yield uses the current market price:

Current dividend yield = annual dividend / current share price

Using the same example, if the share now trades at 80 and pays 2.00 per year, the current dividend yield is:

2.00 / 80 = 2.5%

Your yield on cost is still 5% because your original cost was 40. This is why the two metrics can tell different stories. Yield on cost reflects your personal investment history; current yield reflects the opportunity available to a new buyer today.

Why it is useful

Yield on cost is useful for tracking dividend income growth inside a portfolio. If a company raises its dividend consistently, an investment that started with an ordinary yield can become a strong income generator over time.

It also helps long-term investors see the effect of patience. A quality business bought at a reasonable valuation can produce a growing stream of cash without requiring additional capital. In dividend growth investing, yield on cost makes the income compounding process easier to understand.

Important limitations

Yield on cost should not be the only reason to keep a stock. It can make a position look better than it really is if you ignore opportunity cost. A stock may show an 8% yield on cost, but if the business is weakening, the dividend is at risk, or better alternatives exist, that historical metric does not justify holding it by itself.

It can also hide the yield on the capital you currently have at work. If a stock has appreciated significantly, your yield on cost may be high while the current dividend yield is low. In that case, it is useful to compare the position with other opportunities using today's market value, not only the original purchase price.

Practical example

Imagine you buy 100 shares at 25 each. Your initial investment is 2,500. The company pays 0.75 per share per year, so you receive 75 in annual dividends and your initial yield on cost is 3%.

Five years later, the dividend has grown to 1.50 per share. You now receive 150 per year on the same original 2,500 investment. Your yield on cost is 6%.

This can become powerful when combined with dividend reinvestment, regular contributions, and companies that can grow earnings over long periods.

How to interpret it

A rising yield on cost is usually a positive sign when it is supported by sustainable earnings, free cash flow, and a reasonable payout ratio. It means the company is increasing shareholder income without requiring you to invest more money in the original position.

But it should always be analyzed alongside other metrics: earnings per share growth, free cash flow, debt, payout ratio, current dividend yield, and valuation. The goal is not to celebrate a high percentage on an old purchase price, but to decide whether the position remains a good risk-adjusted source of income.

In short, yield on cost is a useful tool for measuring the progress of a dividend strategy, but it does not replace business analysis or comparison with current market opportunities.