Yield on cost compares annual dividends with historical purchase cost, showing income growth but not current yield, total return, or dividend safety.
Yield on cost (YOC) is current annual dividend income divided by the historical purchase cost of the shares producing it. It shows how much annual income a past investment now generates relative to its cost, rather than relative to today’s market value.
YOC can help track dividend growth on a holding. It cannot, by itself, show whether that holding is profitable, whether its dividend is sustainable, or whether keeping it is preferable to another investment.
For a single purchase lot with no share changes:
Here, (D) is the annual dividend per share and (C_0) is the original cost per share. Express the resulting ratio as a percentage. State whether the cost includes purchase fees.
The corresponding current dividend yield replaces historical cost with today’s price:
Neither formula includes capital gains or losses.
Suppose an investor bought 100 shares for $50 each, a $5,000 outlay. The shares now trade at $100 and pay an indicated annual dividend of $3 per share. Assume no fees, taxes, additional purchases, or share changes.
| Measure | Calculation | Result |
|---|---|---|
| Indicated annual dividend income | 100 shares multiplied by $3 | $300 |
| Yield on cost | $300 divided by $5,000 | 6% |
| Current market value | 100 shares multiplied by $100 | $10,000 |
| Current dividend yield | $300 divided by $10,000 | 3% |
Both yield figures describe the same $300 annual income rate. The difference is the denominator, not extra cash received by the original investor.
For a new buyer paying $100, initial YOC and current dividend yield would both be 3%, before costs. Different shareholders can therefore have different YOCs while owning shares with identical current dividend rights.
In the example, the investor has $10,000 of market value tied to a holding with a 3% indicated dividend yield.
A hypothetical alternative with a 4% current income yield would indicate $400 per year on $10,000, compared with the existing holding’s $300. Comparing the existing 6% YOC with the alternative’s 4% current yield would wrongly suggest the existing holding provides more income on the same current capital.
This is an arithmetic comparison, not a recommendation to switch. Dividend uncertainty, growth prospects, capital risk, liquidity, diversification, sale costs, and taxes could all change the analysis. Actual reinvestable proceeds may also be less than quoted market value.
YOC answers a historical-cost question. Current yield answers a current-price income question. Neither alone answers the full hold-or-sell question.
Suppose the original $50 share paid $2 annually at purchase and now pays $3:
Annual income per share rose 50%. YOC increased by 2 percentage points, not by 2%.
No dividend reinvestment is needed for this change. The company increased the payment attached to each share.
Reinvestment is a separate process: received dividends buy additional shares, which may produce additional dividends. FINRA’s stock overview explains dividend reinvestment plans. Reinvestment can compound a holding, but it does not ensure future dividends or prevent capital losses.
The dividend growth rate measures changes in comparable per-share dividends; YOC relates a chosen annual dividend amount to historical cost.
For a holding built through several purchases, one consistent approach is:
Suppose the investor originally bought 100 shares at $50, then bought 20 more at $100. At $3 annual dividends per share:
Dividing the new $360 income by only the original $5,000 would produce 7.2%, but it would ignore the later $2,000 investment.
Under the purchase-cost approach, include the acquisition cost of shares bought with reinvested dividends too. A different statistic, income relative to original external cash contributed, can be tracked separately, but label it clearly rather than mixing denominators.
For partial sales, use the income and cost attributable to the remaining shares. Tax basis can be adjusted under rules that differ from a simple purchase-cost ledger; this educational metric is not a substitute for jurisdiction-specific tax records.
A stock split requires comparable share units. In a two-for-one split with unchanged aggregate annual dividends, a $50 historical cost becomes $25 per new share and a $3 annual dividend becomes $1.50. YOC stays at 6%; the split itself creates no extra income.
| Dividend measure | What goes into YOC | Main caution |
|---|---|---|
| Trailing | Dividends over the previous 12 months | May include an old payment rate or a one-time special dividend |
| Indicated | Latest regular dividend multiplied by payment frequency | Assumes payments continue at that rate |
| Forecast | Estimated dividends over a future year | Depends on payments not yet declared |
| Net cash income | Dividends after specified withholding or fees | Depends on the investor, account, and currency |
A quarterly dividend of $0.75 implies an indicated annual amount of $3 only if that quarterly payment continues. It does not mean an investor who bought yesterday has already received $3 per share.
Fidelity’s dividend-yield explanation discusses the income-to-price calculation and why the dividend rate and stock price must be interpreted together. Changing the denominator to historical cost does not remove uncertainty from the dividend numerator.
Assume a separate one-year investment: a share costs $50, pays $3 during the year, and ends the year worth $30.
| Measure | Result |
|---|---|
| YOC using that year’s $3 dividend | 6% |
| Price return | -40% |
| Total return, including the dividend and excluding costs | -34% |
The 6% income-on-cost figure is mathematically correct, but it does not offset the $20 fall in share value. If the $3 annual rate continued, current dividend yield at the $30 price would be 10%; that larger percentage would not make the past loss disappear.
The SEC’s stock investor guide explains that stockholders can lose money despite holding an ownership interest in a company.
YOC does not measure dividend affordability. Review cash generation, debt obligations, and the dividend payout ratio separately. Common dividends can be reduced or stopped.
It also omits the time taken to reach today’s income level. A 6% YOC reached after two years and the same YOC reached after twenty years are not equivalent performance records.
Keep price changes, cumulative dividends, reinvestment, inflation, taxes, and fees in the wider return analysis. Historical cost can explain a holding’s income history without becoming an anchor that overrides current evidence.
This article is general financial education, not personalized investment, retirement, or tax advice.