How the Yield on Cost Formula Works
To find your current yield on cost on a stock you already own, divide the current annual dividend per share by your average purchase price per share:
Yield on Cost (%) = (Annual Dividend Per Share ÷ Average Purchase Price) × 100To project how your yield on cost will grow over `N` years when a company raises its dividend by `g`% per year (without adding DRIP shares):
Future Yield on Cost (%) = Starting Yield × (1 + Dividend Growth Rate)^NWorked Example: $40 Purchase Price With a $2.00 Annual Dividend
Suppose you bought **100 shares** of a dividend stock a few years ago at an average purchase price of **$40.00 per share** (**$4,000 total cost basis**). At the time, it paid `$1.40` per share (a `3.50%` yield).
After several annual dividend raises, the company now pays **$2.00 per share** per year:
- Your Annual Dividend Income: `100 shares × $2.00` = **$200.00 per year**.
- Your Yield on Cost: `($2.00 ÷ $40.00) × 100` = **5.00%**.
Even if the stock’s share price has risen to `$57.00` today (so new buyers only get a `3.51%` current dividend yield), you are earning a **5.00% yield** on your original `$40.00` purchase price.
How Dividend Growth Multiplies a 3.5% Starting Yield
This table shows how a **3.50% starting yield** grows over 5, 10, 15, and 20 years at different annual dividend growth rates (before counting extra shares from DRIP):
| Annual Dividend Growth | Year 5 YoC | Year 10 YoC | Year 15 YoC | Year 20 YoC |
|---|---|---|---|---|
| 3% Growth / yr | 4.06% | 4.70% | 5.45% | 6.32% |
| 6% Growth / yr | 4.68% | 6.27% | 8.39% | 11.22% |
| 8% Growth / yr | 5.14% | 7.56% | 11.10% | 16.31% |
| 10% Growth / yr | 5.64% | 9.08% | 14.62% | 23.55% |
Common Mistakes With Yield on Cost
- Using yield on cost to justify keeping a bad stock: If a stock has grown to `$100` per share and pays `$3.00` a year, your current market yield is `3.0%` even if you bought it years ago at `$20` (a `15%` yield on cost). Always make sure the company’s future prospects are still strong.
- Assuming past 12% dividend growth will last forever: As companies mature, their annual dividend raises often slow down from double digits to 5% or 6%. Use realistic growth numbers in our dividend growth calculator.
- Forgetting that DRIP pushes yield on cost even higher: The table above shows dividend growth on your initial shares alone. Reinvesting dividends buys extra shares that boost your total income much faster.