Yield on Cost: Dividend Yield on What You Paid, and Its Limits

The position line reads: 100 shares, cost basis $4,000, market value $6,000. The income report for the year shows $240 in dividends. Yield on cost and current yield both come out of those figures, and they answer different questions.

What yield on cost shows

It measures growth in your income. Suppose the stock paid $1.60 a share when you bought it. At $40 that was a 4% yield. The payout has since grown to $2.40, so the same $4,000 now produces $240 a year where it once produced $160, and the jump from 4% to 6% on your original stake is the plain result of the company raising its dividend while you held.

For someone building retirement income, that’s worth tracking. It shows which payouts grew. Companies that raise their dividend every year, such as a dividend aristocrat, are where the gap between yield on cost and the yield on the day you bought widens fastest.

Why it can mislead

The holding is worth $6,000 today. Whether to keep it depends on what $6,000 could earn now.

That’s what current yield measures. The market will pay you $6,000 for the shares, so staying in is the same as buying $6,000 of the stock today at a 4% yield. Yield on cost says 6%, and the 6% is real history, but it’s measured on a price nobody will offer you again, and if a different holding of similar quality paid 5% on today’s price, the 6% figure would make the weaker choice look like the stronger one.

It can also make a dividend cut hurt less on paper than it should. If the dividend falls from $2.40 to $1.60, yield on cost drops back to 4%, which still looks respectable against the original price, while the business behind the cut may be in real trouble. Suppose the price also fell to $32 on the news. Current yield is then $1.60 / $32 = 5%, higher than the 4% yield on cost, and anyone watching only yield on cost would miss that the market now prices the stock as a riskier income source. The dividend cut case study follows a holding through exactly that.

Where the numbers are on a brokerage statement

Cost basis appears on the positions page and the statement, usually per lot and in total, sometimes labeled cost or adjusted cost, and if you reinvest dividends each reinvestment adds a new lot with its own price, so the total basis creeps up over the years. Dividends are on the income or activity report. Add up the last twelve months. Or multiply the latest regular payment by the number of payments a year.

Divide the annual dividend by the total cost basis. With reinvestment, use totals.

The figure dips below 6% because the new shares were bought at a higher price. Each reinvestment at a higher price pulls the blended number down a little, which is correct: that money went in later and at a lower yield. The dividend yield calculator handles both yields from the same inputs.

What people get wrong

The first mistake is quoting yield on cost as the stock’s yield. A new buyer gets 4%.

The second is holding a position because its yield on cost is high. The figure only grows with time and dividend raises, so almost every long-held dividend stock looks good by it, including ones that have stopped growing and ones that are about to cut.

The third is comparing yield on cost across holdings bought at different times. Older purchases win on it by default.

Related terms

Current yield is the dividend over today’s price. Cost basis is what you paid, adjusted for reinvestment and certain corporate actions. Dividend growth rate is the yearly rate at which the payout rises. More on building an income portfolio sits under dividends.