Yield on cost: useful number or comforting illusion?

You'll see it in forums all the time: "My yield on cost on this stock is 11%!" It sounds incredible next to a savings account. But the stock might yield 2.5% to anyone buying today, and that gap is exactly where the confusion starts.

The formula

yield on cost = current annual dividend per share ÷ the price you paid per share × 100

You bought at $50 when the stock paid $1.00 a year: a 2% starting yield. Years later it pays $2.40. Your yield on cost is $2.40 ÷ $50 = 4.8%, even if the stock now trades at $110 and yields about 2.2% to a new buyer.

How fast yield on cost grows

It grows at exactly the dividend growth rate. Here's a $50 purchase with a $1.00 starting dividend growing 9% a year:

A handy shortcut: divide 72 by the dividend growth rate to estimate how long it takes your yield on cost to double. At 9% growth, about 8 years. At 5%, about 14. At 2%, about 36, which is why slow-growing high yielders rarely produce eye-popping yields on cost.

Yield on cost with several purchases

Most people buy a stock more than once. Use totals, not an average of percentages:

At a current dividend of $2.20 a year, the position pays $506. Blended yield on cost: $506 ÷ $12,350 = 4.10%. Averaging the three lots' individual yields would give a slightly different, wrong answer, because it ignores how much you put into each.

What it's genuinely good for

• Seeing dividend growth pay off. It turns an abstract "8% a year" into something concrete: what your original dollars earn now.
• Retirement income planning. If you live off a portfolio you built years ago, yield on cost tells you what that money produces in cash.
• Staying the course. Watching income climb while the price goes nowhere for a year or two helps a lot of people avoid selling at the wrong time.

Where it misleads: the opportunity-cost test

Here's the trap. Your purchase price is history. The question you actually face is: should this money stay here, or go somewhere else? And the money isn't worth what you paid; it's worth today's market value.

Imagine two investors who each own $50,000 worth of the same stock today, which yields 2.5%. One bought years ago and has a 10% yield on cost. The other bought last month and has a 2.5% yield on cost. Do they own different investments? No. Each of them would get exactly the same income by selling and buying something else. The 10% figure is a scoreboard of the past, not a reason to stay.

It also ignores the share price completely. A stock whose dividend doubled while its price halved can show an impressive yield on cost and still have lost you money. Always look at it next to total return (dividends plus price change).

A better dashboard

Track three numbers together, not one:

1. Current yield: what the market offers today (our dividend yield calculator shows it next to your yield on cost).
2. Yield on cost: how far your income has come.
3. Total return: whether the investment as a whole has worked.

To see how yield on cost could develop under your own assumptions, the dividend calculator projects it year by year, and the payout ratio guide helps you judge whether that dividend growth is likely to continue.