Yield on Cost — The Dollar Dictionary

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Investment

Yield on Cost

The annual dividend income a stock pays divided by the original price paid for that stock — showing the effective income return based on purchase price rather than current market value.

Yield on cost is calculated simply: annual dividend per share ÷ original cost per share × 100. If you paid $30 for a stock that now pays $3 annually in dividends, your yield on cost is 10%. This number grows over time as companies increase their dividends — which is why dividend growth investors focus intensely on the dividend growth rate, not just the current yield.

Critics argue yield on cost is psychologically misleading — what matters economically is the current yield and the opportunity cost of holding versus reallocating capital. A 10% yield on cost from a stock bought at $30 that now trades at $100 looks impressive, but a new buyer only earns 3% on that capital. The investor should evaluate whether reinvesting the $100 elsewhere offers better returns than continuing to hold for the locked-in 10% yield on the historical cost basis.

It's the dividend you're earning on what you actually paid, not what the stock is worth today. If you bought Coca-Cola at $20 per share 20 years ago and they now pay $1.80 in annual dividends, your yield on cost is 9% — even if the stock now trades at $60 and today's yield for new buyers is only 3%. You locked in a much better income rate by buying early.

Real world: Long-term investors in dividend growth stocks like Johnson & Johnson, Procter & Gamble, or Realty Income often achieve yields on cost of 8-15% on positions held for 15-20 years — even though current buyers receive 2-4% yields. This compounding of dividends over time is one of the most powerful arguments for dividend growth investing as a long-term wealth building strategy.

💡 Yield on cost rewards patient investors who bought quality dividend growers early — but always weigh it against opportunity cost, since what matters is the return on current capital, not historical cost.

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