Yield on Cost
Yield on cost divides a stock’s current annual dividend by the price the investor originally paid, rather than by today’s market price. It answers one question precisely: how much income does each dollar committed years ago produce now? As a scoreboard for dividend growth investing it is honest; as a decision input it is treacherous.
The math
An investor bought a hypothetical stock at $60 a decade ago, when it paid $1.80, a 3 percent yield. Steady raises lifted the dividend to $4.20, so yield on cost is 4.20 / 60 = 7.0 percent.
Meanwhile the stock trades at $140, making the current yield 3 percent.
| Purchase, 10 years ago | Today | |
|---|---|---|
| Share price | $60 | $140 |
| Annual dividend | $1.80 | $4.20 |
| Current yield | 3.0% | 3.0% |
| Yield on cost | 3.0% | 7.0% |
On 500 shares, the position pays $2,100 a year against a $30,000 original outlay, but against $70,000 of present market value.
Both statements are true; only the second describes the capital actually at stake today.
The trap
Yield on cost flatters holdings into permanence. An investor staring at “7 percent” refuses to sell a deteriorating business because no replacement offers that number, forgetting that the $70,000 could buy $2,800 of income elsewhere at a 4 percent current yield.
The metric cannot fall when the stock’s prospects do, so it anchors decisions to a purchase price the market stopped caring about years ago. Held to its logic, no successful dividend position should ever be sold, which is how portfolios accumulate aging former winners.
The move
Use yield on cost as a measurement of process, never as a hold signal. It verifies that the dividend growth thesis worked: a rising figure means the raises compounded as projected.
For every buy, hold, or sell decision, switch to current yield on current value and compare against alternatives, because capital has no memory. One useful reflex: whenever yield on cost is quoted with pride, immediately compute what the same dollars would earn if redeployed today.