For example, a 5% yield on cost means that for every $100 originally invested in a stock, an investor is receiving $5 per year in dividends.
If a company raises its dividend after you bought shares, you will enjoy a higher rate of income return on your original investment – your yield on cost rises.
Investors track yield on cost to see the power of dividend growth. It is exciting to see an investment pay for itself with higher dividend income over time!
How to Calculate Yield on Cost
- Yield on Cost = Annual Dividend Income divided by Cost Basis
To calculate yield on cost for an individual holding, first find the holding's current annual dividend per share.
Using Simply Safe Dividends, we can see that Coca-Cola pays an annual dividend of $1.76 per share.
A company’s annual dividend then needs to be divided by the investor’s cost basis per share. Cost basis represents the price an investor paid to acquire his or her shares.
Suppose you bought 100 shares of Coca-Cola in 2019 for $5,000. This works out to a cost basis per share of $50 ($5,000 original cost divided by 100 shares purchased).
Dividing Coke's current $1.76 per share annual dividend by your $50 per share cost basis calculates a yield on cost of 3.52%.
If Coke raised its dividend by 4% to $1.83 per share, your yield on cost would rise to 3.66% ($1.83 per share dividend divided by $50 per share cost basis).
Yield on cost increases when a company raises its dividend and decreases when a company cuts its dividend.
Yield on Cost vs. Dividend Yield
Dividend yield shows how much dividend income every dollar invested at a stock's current price will produce, whereas yield on cost shows the rate of dividend income earned based on an stock's original cost.
Dividend yield fluctuates daily because it divides a company's annual dividend per share by the stock's latest share price rather than an investor's cost basis in the stock.
Share prices do not impact yield on cost. Yield on cost only changes if a company raises or lowers its dividend, or an investor buys or sells shares at a different cost per share.
Using the Coca-Cola example above, suppose shares now trade at $60.
Coke's $1.76 per share dividend would result in a current dividend yield of 2.93% ($1.76 per share dividend divided by latest stock price of $60).
But your yield on cost would still be 3.52% ($1.76 per share dividend divided by original cost basis of $50 per share), regardless of where Coke's share price heads from here.
Tracking Your Portfolio’s Dividend Yield on Cost
We created a dividend portfolio tracker that takes care of the heavy lifting required to calculate a portfolio's yield on cost, in addition to other helpful metrics such as dividend safety.
Investors can view yield on cost information for any individual holding, with dozens of other column options also available.
If you want to review the dividend yield on cost of your portfolio, you might be interested in taking a free trial of our dividend portfolio tracker.
What Is Yield on Cost Used For?
This is a key advantage that dividend growth investing has over purchasing securities such as bonds that have fixed interest rates.
While stocks are much more volatile investments, a bond paying 2% today will still be paying 2% in the future – regardless of inflation.
Quality dividend stocks provide an opportunity to earn higher income on our original investment over time, reflected by a rising yield on cost.
And a portfolio that sees its yield on cost rise is likely appreciating in value because rising dividends are often the sign of a healthy, growing business.
Using the UNP example above, if the company’s dividend rose from $5.20 per share in 2022 to $9.62 in 2030, its stock price would almost certainly have appreciated.
If UNP continued to yield about 2.5% in 2030, just like it did when our shares were bought in 2022, UNP's share price would be about $388, up over 80% since our initial purchase.
Seeing yield on cost rise over time can help investors stay the course and remember the long-term compounding benefits of a dividend growth strategy, especially in retirement.
Don't Focus Too Much on Yield on Cost
Instead, yield on cost simply informs an investor whether a stock’s dividend has increased or fallen since the investment was purchased, and we shouldn’t always extrapolate past results.
Instead, we focus on metrics that provide clues about a company’s future, with a goal to own businesses that steadily grow their earnings over the long term to fuel sustainable dividend growth and a more valuable portfolio.
Closing Thoughts on Yield on Cost
While a rising yield on cost can signal a winning dividend growth strategy, the measure itself is not all that useful when it comes to making incremental investment decisions.
As the great hockey legend Wayne Gretzky once said, “I skate to where the puck is going to be, not where it has been.”