What Is Yield on Cost?
Yield on cost (YOC) is the dividend yield calculated using your original purchase price rather than the current market price. If you bought a stock at $30 per share and it now pays a $2.40 annual dividend, your yield on cost is 8.0% even if the stock now trades at $60 (where the current market yield would only be 4.0%). Yield on cost reveals the true income return on your original investment and is one of the most rewarding metrics for long-term dividend growth investors to track.
The power of yield on cost becomes apparent over long holding periods with companies that consistently grow their dividends. An investor who bought Johnson & Johnson in 2000 at roughly $40 per share now receives approximately $4.96 in annual dividends, producing a yield on cost of 12.4% on what was initially a 1.5% yield stock. This transformation from modest yield to double-digit income is the fundamental promise of dividend growth investing.
Current market yield tells you what a new buyer earns. Yield on cost tells you what YOU earn based on YOUR purchase price. The gap between them widens over time as dividends grow and your cost basis stays fixed. A stock yielding 3% at purchase can become a 10%+ yield on cost within 15-20 years of 7% annual dividend growth.
Yield on Cost Formulas
- 1Current Yield on Cost = $2.40 / $30.00 = 8.0%
- 2Current Market Yield = $2.40 / $60.00 = 4.0%
- 3Year 5 Dividend = $2.40 x (1.07)^5 = $3.37
- 4Year 5 YOC = $3.37 / $30.00 = 11.2%
- 5Year 10 Dividend = $2.40 x (1.07)^10 = $4.72
- 6Year 10 YOC = $4.72 / $30.00 = 15.7%
- 7Current annual income = 100 x $2.40 = $240
- 8Year 10 annual income = 100 x $4.72 = $472
- 9Total dividends over 10 years = approximately $3,316
Yield on Cost Growth Over Time
| Year | 5% Growth | 7% Growth | 10% Growth | 12% Growth |
|---|---|---|---|---|
| Year 0 | 4.0% | 4.0% | 4.0% | 4.0% |
| Year 5 | 5.1% | 5.6% | 6.4% | 7.1% |
| Year 10 | 6.5% | 7.9% | 10.4% | 12.4% |
| Year 15 | 8.3% | 11.0% | 16.7% | 21.9% |
| Year 20 | 10.6% | 15.5% | 26.9% | 38.5% |
| Year 25 | 13.5% | 21.7% | 43.3% | 68.0% |
Building a High-YOC Portfolio
Maximizing Yield on Cost Over Time
- Yield on cost is a personal metric: two investors in the same stock will have different YOCs based on their purchase prices
- DRIP investing supercharges YOC by continuously adding shares at varying prices
- A 7% dividend growth rate doubles your YOC approximately every 10 years (Rule of 72: 72/7 = 10.3 years)
- YOC does not account for total return; a stock could have high YOC but poor capital appreciation
- Tax-advantaged accounts (IRA, 401k) maximize the benefit of growing YOC by deferring dividend taxes
Do not hold a stock solely because of high yield on cost. If fundamentals deteriorate and a dividend cut is likely, selling and reinvesting at a lower but more sustainable yield may be the better decision. YOC is a backward-looking metric; always pair it with forward-looking analysis of dividend safety and business quality.
Selling covered calls on dividend stocks adds option premium income to your dividend income, effectively boosting your 'total yield on cost.' A stock with 8% YOC from dividends plus 4% from covered call premiums delivers a 12% effective income yield on your original investment.