Yield on Cost vs Dividend Yield: What's the Difference?
Yield on cost is often confused with dividend yield, yet each measures a different aspect of income performance. This guide breaks down both metrics so you can track your dividend returns with clarity and confidence.
In our previous article we outlined the core indicators that shape a strong income-focused strategy. One metric we touched on briefly—but deserves a deeper look—is yield on cost, especially in comparison to the more commonly cited dividend yield. Although these two figures may appear similar, they measure different aspects of return and can influence how you evaluate the long-term performance of your portfolio. In this guide, we'll break down each metric, explain how they're calculated, and show why understanding the difference is essential for any dividend investor.
What Is Dividend Yield?
Dividend yield is one of the first metrics investors look at when evaluating an income-producing stock. It represents the relationship between a company's annual dividend payout and its current share price. The formula is straightforward: annual dividend per share divided by the market price of the stock today.
Because dividend yield is tied directly to the current market price, it changes constantly. When a stock's price rises, the yield naturally falls; when the price drops, the yield increases, even if the company keeps its dividend unchanged. This makes dividend yield useful for comparing income potential across different companies and for understanding how the market currently values a dividend payer. However, it only shows the present picture and does not reflect how your own investment has performed over time.
What Is Yield on Cost?
Yield on cost, often abbreviated as YOC, tells a different story. Instead of using the current share price, it measures dividend income relative to the price you originally paid. The calculation is the annual dividend per share divided by your purchase price per share. Since your cost basis never changes, yield on cost increases only when the company raises its dividend.
This makes yield on cost particularly valuable for long-term investors. It highlights the growth of your income over time and shows how much more powerful your returns have become as dividends increase. An investor who bought a stock at $50 that now pays a $3 annual dividend enjoys a 6 percent yield on cost, even if the stock's current yield—based on today's trading price—is far lower.
Understanding the Difference
Although dividend yield and yield on cost share a similar formula, they serve completely different purposes. Dividend yield reflects today's market valuation and helps you decide whether a stock is attractively priced right now. Yield on cost, in contrast, reflects your personal investment history and shows how your income has grown since the moment you bought the shares.
Dividend yield changes continuously with the market, while yield on cost moves only when the company increases its payout. One is a snapshot of the present; the other is a record of long-term progress. Both metrics can point investors to different conclusions depending on the context. A company may look expensive today with a low current yield, yet still provide an excellent yield on cost for investors who purchased shares years earlier.
Why Both Metrics Matter
Dividend investors benefit most when they consider both perspectives together. Dividend yield helps you evaluate new opportunities and understand the stock's current valuation. Yield on cost helps you assess the effectiveness of your past decisions and the strength of a company's dividend growth over time. Together, they provide a fuller picture of your portfolio's income performance and long-term potential.
Conclusion
Understanding the distinction between yield on cost and dividend yield can give investors a clearer perspective on both current income and long-term performance. Dividend yield provides insight into how much income a stock generates at its current market price, while yield on cost shows how your original investment has grown through dividend increases. By tracking both metrics, you can make more informed decisions—evaluating new opportunities while also appreciating the progress of your existing portfolio. Together, they help you measure the true impact of dividend growth and the strength of your income strategy over time.