Yield on Cost - Definition and Formula

Yield on cost is the metric that shows a long-term dividend investor what their patience actually bought. Dividend yield tells a prospective buyer what income a stock offers at today's price. Yield on cost tells an existing owner what the same dividend is worth against the price they paid years ago, which for a company that has raised its dividend steadily is a very different number.

Key takeaways

• Yield on cost is a holding's current annual dividend per share divided by the average cost basis of the shares you own, expressed as a percentage.
• Yield on cost is calculated as annual dividend per share divided by average cost per share, so a $3.50 dividend on shares bought at $50 is a 7% yield on cost.
• Yield on cost rises over time whenever a company increases its dividend, because the numerator grows while your cost basis stays fixed.
• Yield on cost is backward-looking and personal to you: two investors holding the same stock have different yields on cost because they paid different prices.
• Yield on cost should not be used to decide whether to keep holding a stock, because the price you paid is a sunk cost and a new buyer would earn only the current dividend yield.

What is yield on cost?

Yield on cost is a financial metric that measures a holding's current annual dividend as a percentage of the average cost basis of the shares, meaning what you originally paid for them. It shows the income rate your own invested capital is now earning.

The metric exists because a dividend grower's income and its share price both rise over time, and the standard dividend yield ratio hides that. Dividend yield divides the dividend by the current market price, so a company that doubles its dividend while its share price also doubles shows an unchanged dividend yield, even though every long-term holder's income has doubled.

Yield on cost holds the denominator still. Because your cost basis does not change when the market re-rates the stock, every dividend increase flows straight through to a higher yield on cost. That makes it the natural scorecard for a buy-and-hold dividend strategy.

How is yield on cost calculated?

Yield on cost is calculated by dividing the current annual dividend per share by your average cost basis per share, then multiplying by 100 to express it as a percentage.

Yield on Cost = (Annual Dividend Per Share / Average Cost Basis Per Share) x 100

The same figure can be computed at the position level, which is often easier when shares were bought in several lots:

Yield on Cost = (Total Annual Dividend Income From The Position / Total Amount Invested) x 100

Two inputs are needed:

1. Current annual dividend per share. The total dividend the company pays on one share over a year, at its current rate. For a quarterly payer, add the four most recent quarterly payments.
2. Average cost basis per share. The total you paid for the shares, including commissions, divided by the number of shares. Working out cost basis across multiple purchases is the fiddly half of the calculation.

For example, an investor who bought shares at an average cost of $50 and now receives an annual dividend of $3.50 per share has a yield on cost of $3.50 / $50 = 7%.

A second example shows how quickly the two metrics diverge. Suppose you bought at $20 a share when the dividend was $0.60, a 3% yield at the time. Ten years later the company pays $1.60 a share and the stock trades at $80. The current dividend yield is $1.60 / $80 = 2%, but your yield on cost is $1.60 / $20 = 8%. A new buyer earns 2%; your original capital earns 8%.

Rebuilding that calculation by hand means keeping every purchase price, every commission and every dividend payment straight, per holding, sometimes in more than one currency. Portseido maintains cost basis from your transaction history and reports yield on cost alongside dividend yield for every position, so the number updates itself as you buy more shares or the company raises its dividend.

What is the difference between yield on cost and dividend yield?

Yield on cost divides the current annual dividend by what you paid for the shares, while dividend yield divides the same dividend by what the shares cost today. The numerator is identical; only the denominator differs.

The practical consequence: yield on cost cannot be compared between investors or against a stock's published yield. If you hold a stock with a 7% yield on cost and a friend buys the same stock today at a 3% dividend yield, you are both receiving exactly the same dividend per share. Your 7% describes the price you paid, not a superior income stream.

A third dividend ratio completes the set. The dividend payout ratio divides the dividend by the company's earnings rather than by any price, and it is the one that indicates whether the dividend can be maintained at all.

What is a good yield on cost?

There is no universal threshold for a good yield on cost, because the figure depends entirely on how long you have held the shares and what you paid. A yield on cost of 8% is unremarkable after twenty years of dividend increases and exceptional after two.

What matters is the direction of travel. A yield on cost that climbs year after year is evidence that the company keeps raising its dividend, which is the whole thesis of dividend growth investing. A yield on cost that is flat means the dividend has not moved, and one that falls means the dividend was cut.

Judge yield on cost against its own history rather than against a benchmark:

• Rising steadily. The dividend is growing. Companies with long records of this, such as the dividend aristocrats, are selected specifically for it.
• Flat. The dividend is static, so the real value of the income is being eroded by inflation.
• Falling. Either the dividend was reduced, or you bought more shares at a higher price, which raises your cost basis.

Does buying more shares change your yield on cost?

Yes. Buying more shares changes your average cost basis, which changes yield on cost, and buying at a higher price than your original purchase will lower it even if the dividend has not changed.

This is where yield on cost is most often misread. An investor dollar-cost averaging into a rising dividend stock will see yield on cost climb more slowly than the dividend growth rate alone would suggest, because each new purchase drags the average cost upward. Reinvested dividends do the same thing: shares bought through a dividend reinvestment plan enter the cost basis at market price.

Neither effect is a problem, but it does mean yield on cost measures two things at once for an accumulating position: dividend growth and your purchase history. Where you want to isolate dividend growth alone, track the dividend per share rather than the ratio.

What are the limitations of yield on cost?

The main limitation of yield on cost is that it is backward-looking and ignores the price you could sell at today, so it must not be used to decide whether to continue holding a position.

• The cost basis is a sunk cost. Capital tied up in a stock is worth its current market value, not what you paid. The honest comparison for a hold-or-sell decision is the current dividend yield against alternatives, not your historical yield on cost.
• It ignores elapsed time. Yield on cost says nothing about how many years it took to get there, so it cannot be annualised or compared across holdings of different ages.
• It excludes capital gains. Yield on cost counts only dividends. A holding can have a magnificent yield on cost and still have delivered a poor total return, and vice versa.
• It flatters inaction. Because it rises automatically with every dividend increase, yield on cost makes long-held positions look better the longer they are held, regardless of whether they are still good investments.

Use yield on cost to review how a dividend strategy has performed. Use dividend yield, total return and the payout ratio to decide what to do next.

Frequently asked questions

Should yield on cost include reinvested dividends?

If reinvested dividends bought additional shares, those shares and their purchase cost belong in the cost basis, so yield on cost is calculated on the enlarged position. Excluding them overstates the ratio. The alternative convention, measuring only the original shares, answers a narrower question and cannot be reconciled with your brokerage statement.

Can yield on cost be higher than 100%?

Yes, in principle. A holding whose annual dividend has grown to exceed the original purchase price per share has a yield on cost above 100%, meaning the position now returns more than its entire cost every year. This requires decades of compounding dividend growth on a share bought at a low price, so it is rare rather than impossible.

Does yield on cost change when the share price moves?

No. Yield on cost uses your average cost basis as the denominator, and that figure is fixed by your purchase history rather than by the market. A share price collapse leaves yield on cost untouched, which is exactly why it should not be read as a measure of how the investment is currently doing.

Which is more useful, yield on cost or total return?

Total return is more useful for judging an investment, because it counts dividends and price change together and can be compared against a benchmark. Yield on cost answers a narrower question: how much income your original capital now produces. Income-focused investors track both, using total return for performance and yield on cost for income growth.

How to track yield on cost in Portseido

Yield on cost is only as accurate as the cost basis behind it, and cost basis is the record most investors lose track of first, especially after several years of purchases, dividend reinvestments and a broker switch. Portseido rebuilds it from your transaction history, tracks every dividend received, and reports yield on cost per holding next to dividend yield, cost basis and total return. Because it consolidates positions across multiple brokers and currencies, the same figures cover the whole portfolio rather than one account.

It is built for long-term dividend investors who want their income growth measured rather than estimated. Portseido tracks and reports on your portfolio; it does not give buy or sell recommendations. There is a free plan, and paid features come with a 14-day trial that does not need a credit card. Try Portseido free