Definition and Formula
Yield on Cost (YOC) is calculated by dividing the current annual dividend per share by your original purchase price per share. If you bought a stock at $50 and it now pays an annual dividend of $3, your YOC is 6%, even though the stock's current dividend yield (based on today's market price of, say, $100) is only 3%. YOC reflects the income return on your original capital outlay and naturally rises over time for companies that consistently increase their dividends.
The Power of Dividend Growth Over Time
The appeal of YOC becomes vivid with a long-term example. Suppose you bought shares at $50 with an initial dividend of $1.50 (a 3% yield). If the company raises its dividend by 7% annually, after 15 years the annual dividend reaches approximately $4.14 per share. Your YOC is now 8.3%, more than double the original yield, and you have not invested a single additional dollar. After 25 years at the same growth rate, the dividend reaches $8.13, giving you a YOC of 16.3%. This compounding of income is the core thesis behind dividend growth investing.
The Opportunity Cost Trap
Despite its motivational power, YOC can be dangerously misleading. A high YOC does not mean you are earning a high return on your current wealth. If your $50 stock has risen to $100, your capital is $100, not $50. The relevant question is whether that $100 is earning the best possible return. A YOC of 8% on your original $50 is actually a 4% yield on your current $100 of capital. If you could sell and reinvest in a different stock yielding 5% on $100, you would earn more income. Anchoring to YOC can trap investors in underperforming positions simply because the metric looks impressive relative to a historical cost that is economically irrelevant.
When the Stock Price Drops but the Dividend Holds
A particularly tricky scenario occurs when a stock's price declines but the dividend remains unchanged. Your YOC stays the same (it is based on your purchase price), but the current yield spikes, which might look attractive. However, a falling price with a stable dividend often signals that the market expects a future dividend cut. Companies like General Electric maintained their dividend even as the stock fell from $30 to $10 between 2017 and 2018, only to slash the dividend by 92% shortly after. YOC gave no warning of this risk because it ignores market price entirely. Dividend investing guides discuss yield metrics and their pitfalls
Using YOC Correctly
YOC is best used as a motivational metric to track the growing income stream from a long-held position, not as a decision-making tool for buy, hold, or sell choices. For investment decisions, always use the current dividend yield (dividend divided by current market price) and total return (dividends plus capital appreciation). Compare your holding's total return against a relevant benchmark. If a stock's total return consistently trails the index, a high YOC is cold comfort. Think of YOC as a rearview mirror showing how far you have come, while current yield and total return are the windshield showing where you are going.