Yield on Cost

Definition

Yield on cost (YOC) measures the annual dividend a holding pays you today against the price you *originally paid* for it — not against what the shares are worth now. It answers a personal question that no fund fact sheet can: relative to the money I actually put in, how much income is this position throwing off?

Written simply:

Yield on cost = annual dividend per share / your original cost per share

Suppose you bought a stock at $40 a share when it paid $1.20 a year in dividends. That was a 3% yield the day you bought it ($1.20 / $40). Years later the company has raised its dividend to $2.40 a share. Your yield on cost is now $2.40 / $40 = 6% — even though a new buyer paying today's higher price might see a current yield of only 3%. Your cost basis never changed, but the growing dividend keeps lifting the income you earn on that original investment.

The key idea is that yield on cost has a fixed denominator. Once you buy, your cost per share is locked in. From then on, every dividend increase pushes your YOC higher, while a new investor's yield resets to the current, higher price. That is why a long-term holder of a dividend grower can end up with a YOC far above what anyone can buy the stock at today.

Why It Matters

Yield on cost matters most to long-term, buy-and-hold income investors who own dividend growers — companies and funds that raise their payouts year after year. It turns an abstract idea, "my dividends keep growing," into a single number you can watch climb. For someone building toward retirement income, seeing a position's YOC rise from 3% to 6% to 9% over a decade is genuinely motivating, and it captures something real: the power of a rising payout stacked on a cost that never moves.

It is also a useful lens on why patience pays in dividend-growth investing. A fund like SCHD, built around companies with long records of raising dividends, or a monthly payer like O that has increased its dividend for decades, can look unremarkable on day one. But hold it while the payout compounds and your yield on cost quietly grows into something a fresh buyer cannot get. YOC makes that long-game reward visible.

But here is the crucial caveat, and it is the reason this whole article exists: yield on cost is backward-looking. It describes a *past* decision — the price you happened to pay — not the *present* opportunity. It cannot tell you whether the position is still a good place for your money today, whether a competing fund would serve you better, or whether the dividend is safe going forward. It feels great, and it should be enjoyed for what it is, but it should never be the number that drives a hold-or-sell decision on its own.

How It's Calculated

Yield on cost uses the price you paid; current yield uses the price today. That one swapped denominator is the entire difference between them:

Yield on cost = annual dividend per share / your original cost per share

Current yield = annual dividend per share / current share price

  annual dividend per share = the payout the holding makes over a full year, now
  original cost per share    = the price you actually paid when you bought
  current share price        = what the shares trade for today

The numerator is the same in both formulas — the dividend the holding pays right now. Only the denominator changes. Because your cost basis is frozen the day you buy, yield on cost drifts *up* every time the dividend is raised. Current yield, by contrast, resets constantly: it rises when the price falls and falls when the price rises, so it reflects what a brand-new buyer would earn today.

A few practical notes:

• Reinvested dividends complicate "cost per share." If you reinvest through a

DRIP, each reinvestment buys new shares at new prices, so your *average* cost per share shifts over time. Most tools compute YOC against your blended average cost across all lots.

• Use the forward annual dividend in the numerator for a clean comparison to

current yield — both should measure the same, current payout.

• YOC only rises if the payout rises. For a fund with a flat or shrinking

distribution, yield on cost simply tracks the payout and offers little of the compounding story below.

Example

Picture buying 100 shares of a steady dividend grower at $50 a share — a $5,000 investment — when it pays $2.00 a share per year. On day one your current yield and your yield on cost are identical: $2.00 / $50 = 4%. Now watch what happens as the company raises its dividend about 8% a year while the share price also climbs. These numbers are illustrative, but the shape is exactly what dividend-growth investors experience:

Notice the two right-hand columns pulling apart. Current yield barely moves — it hovers near 4% the whole time because the price and the dividend rise together, so a new buyer always sees roughly the same yield. Your yield on cost climbs steadily from 4.0% to 9.3%, because your $50 cost is frozen while the dividend more than doubles. By year 12 your original $5,000 is generating $466 a year in income — a 9.3% return *on what you paid* — even though the market only offers newcomers 4.5%.

Now layer in a DRIP. If you reinvest every dividend, you buy additional shares along the way, so your *total* income grows even faster than the per-share YOC alone suggests — the reinvested shares each earn the rising dividend too, compounding the effect. This is why long-term dividend-growth holders talk about their yield on cost with such enthusiasm: it is the visible scoreboard of patience plus compounding.

But keep the caveat firmly in view. That impressive 9.3% YOC does not mean this position is a better *buy* today than an alternative. A new investor — including you, with fresh money — can only get the 4.5% current yield. If a different fund now offers a safer, higher current yield, your money would earn more *there*, regardless of how good your yield on cost looks here. YOC rewards you for the past; it says nothing about where the next dollar should go. For deciding whether income is actually attractive *right now*, lean on current yield, the distribution rate, and the standardized SEC yield instead.

Common Mistakes

• Confusing yield on cost with current yield. They share a numerator but use

different denominators. Current yield ($2.00 / today's $104 price = ~1.9% in the table above if the payout were flat) reflects what a buyer earns *today*; yield on cost reflects what *you* earn on your original price. Quoting your YOC as if it were the fund's yield misleads anyone comparing funds.

• Using a high yield on cost to justify holding a laggard. "But my yield on cost

is 9%!" is not a reason to keep a position that has stopped growing or whose total return trails alternatives. The 9% is on money you committed years ago; the relevant question is what your capital could earn *going forward*, wherever you place it. A high YOC on a stagnant holding is a comfort, not an argument.

• Ignoring opportunity cost. Yield on cost hides the fact that your shares are now

worth far more than you paid. You could sell and redeploy that larger sum, and the right comparison is current yield on the *current* value against other options — not the flattering YOC on your old cost basis.

• Comparing your yield on cost to someone else's. YOC is entirely personal; it

depends on when each investor bought. Two people can own the identical fund with wildly different yields on cost purely because of entry timing. It is meaningless as a fund-vs-fund or investor-vs-investor comparison — only current, standardized yields are comparable across people.

• Treating a rising YOC as proof of a safe dividend. A growing yield on cost

reflects *past* raises. It says nothing about whether the next dividend is sustainable. Check payout coverage and the fund's health, not just the climbing YOC.

FAQ

What is a good yield on cost?

There is no universal "good" number, because yield on cost depends entirely on how long ago you bought and how fast the dividend has grown since. A YOC above the fund's current yield simply means the payout has increased since you invested — the longer you have held a genuine dividend grower, the higher it climbs. A 3% YOC on a stock you bought last year and a 9% YOC on one you bought a decade ago can reflect the exact same fund. Judge it against your *own* starting yield, not a fixed threshold, and never use it to compare against other investors.

Yield on cost vs current yield — what's the difference?

Both divide the same annual dividend by a price, but the price differs. Current yield uses today's share price, so it shows what a new buyer would earn right now and resets as the price moves. Yield on cost uses the price *you* originally paid, which never changes, so it rises every time the dividend is raised. Current yield is the fair, comparable number for deciding where to invest today; yield on cost is a personal record of how much your income has grown on your original investment.

Does yield on cost matter when deciding to buy more?

Not really. When you add fresh money, you buy at today's price, so the relevant figure is the current yield, not your existing yield on cost. New shares earn the current yield regardless of how high your YOC on older shares looks. Basing a buy decision on a flattering YOC confuses a past result with a present opportunity — always evaluate new purchases on current yield and the fund's outlook.

Why does my yield on cost keep going up?

Because your cost per share is fixed while the dividend grows. Every time the company or fund raises its payout, the numerator of the yield-on-cost formula increases but the denominator — your original cost — stays put, so the ratio climbs. If you also reinvest through a DRIP, the added shares compound your income further. A rising YOC is the signature of a healthy dividend grower held over time.

Should yield on cost drive my sell decisions?

No. Yield on cost is backward-looking and tells you nothing about whether a position is still the best home for your money. The right questions when deciding to hold or sell are about total return, dividend safety, and what your capital — at its *current* value — could earn elsewhere. A high YOC often makes investors reluctant to sell a laggard, which is exactly the trap to avoid. Use current yield, distribution rate, SEC yield, and your goals instead.

Do covered-call and high-yield funds have a meaningful yield on cost?

Less so. Yield on cost tells a compelling story only when the payout *grows*. Many high-distribution funds, such as covered-call ETFs like JEPI, pay a large but variable or flat distribution rather than a steadily rising one, so their yield on cost mostly tracks the swinging payout instead of compounding upward. For those funds the distribution rate and total return matter far more than YOC.