Yield on Cost Explained: The Metric Long-Term Dividend Investors Track
Last updated: March 2026
Quick Answer
Yield on cost (YOC) = annual dividend per share ÷ your original cost per share. If you bought Johnson & Johnson at $60 and it now pays $4.76/year, your YOC is 7.93% — regardless of where JNJ trades today. It measures the income return on what you actually paid, not what the market currently values the stock at.
What Yield on Cost Actually Measures
Every dividend stock has two yields worth tracking: current yield and yield on cost.
Current yieldis what any new buyer today would receive. It is calculated as the annual dividend divided by today's stock price. This is the number quoted on every financial website and brokerage platform. It changes every time the stock price moves.
Yield on cost is personal. It is calculated as the annual dividend divided by the price you paid when you bought the stock. It does not change when the stock price moves — only when the dividend changes. As the company raises its dividend over time, your YOC increases year after year while your cost basis stays fixed.
This distinction matters because YOC shows what dividend growth investing actually delivers in practice. A stock that looked like a modest 2.5% yielder when you bought it a decade ago — if the dividend has been growing at 8% per year — now shows roughly 5.4% yield on your original investment. That compounding income growth is invisible to anyone looking at the current yield.
How to Calculate Yield on Cost
The formula is simple:
Formula
YOC = (Annual Dividend Per Share ÷ Cost Basis Per Share) × 100
Your cost basis is the price you paid per share, adjusted for any commissions, return-of-capital distributions, or corporate actions (splits, spin-offs). For most buy-and-hold investors, it is simply the price paid per share.
Example 1: Johnson & Johnson (JNJ)
Purchase price: $60.00/share (hypothetical early purchase)
Current annual dividend: $4.76/share
Current YOC: $4.76 ÷ $60.00 = 7.93%
Current yield based on today's price (~$155): 3.1%
Example 2: Coca-Cola (KO)
Purchase price: $22.00/share (year 2000)
Current annual dividend: approximately $1.94/share
Current YOC: $1.94 ÷ $22.00 = 8.8%
KO's dividend in 2000 was approximately $0.34/share. It has grown roughly 5.7x since then.
Example 3: New purchase for comparison
KO purchased today at approximately $64/share
Current annual dividend: $1.94/share
Current yield AND yield on cost (same thing for new purchase): 3.0%
Those three examples show YOC in action. The investor who bought KO in 2000 at $22 is now earning 8.8% on their original money — from a stock the market currently calls a 3% yielder. Their income has compounded dramatically while their cost basis never changed.
Why Long-Term Investors Track It
Yield on cost serves a specific psychological and analytical purpose for long-term dividend investors. It quantifies the reward for patience.
A stock that has doubled in price since you bought it looks different through the YOC lens. Yes, you could sell and realize the gain. But if the dividend has grown proportionally, your YOC on the appreciated position may be higher than anything you could redeploy into today. Selling a 7% YOC position to buy a 3.5% yielder is a meaningful income trade-off, not a neutral one.
YOC also motivates continued holding during market volatility. When a stock you bought at $60 drops to $45, the unrealized paper loss is uncomfortable. But if the company has continued raising its dividend and your YOC is now 8%, the income stream you are receiving on your original investment has not changed. The business has not deteriorated. Tracking YOC reinforces holding through volatility when the income thesis remains intact.
Warren Buffett's Coca-Cola position is the canonical example. Berkshire Hathaway paid approximately $1.3 billion for KO shares in 1988. KO now pays Berkshire roughly $700+ million per year in dividends — a yield on cost approaching or exceeding 50% on the original investment. Buffett has consistently declined to sell despite the enormous unrealized gain, and the compounding income stream is a primary reason.
How YOC Compounds Over Time
YOC grows at exactly the rate the company raises its dividend. If you buy a stock at a 2.5% current yield and the company raises its dividend 8% per year, your YOC doubles roughly every 9 years.
YOC Growth on a 2.5% Initial Yield
At different annual dividend growth rates. Cost basis fixed. No additional purchases.
| Year | 5% Growth | 8% Growth | 12% Growth |
|---|---|---|---|
| Year 1 | 2.50% | 2.50% | 2.50% |
| Year 5 | 3.19% | 3.67% | 4.41% |
| Year 10 | 4.07% | 5.40% | 7.75% |
| Year 15 | 5.20% | 7.92% | 13.64% |
| Year 20 | 6.63% | 11.63% | 24.00% |
| Year 25 | 8.47% | 17.09% | 42.23% |
Hypothetical illustration. Assumes constant dividend growth rate and unchanged cost basis. Actual dividend growth varies year to year and is not guaranteed.
At 8% annual dividend growth — roughly what strong Dividend Aristocrats like Visa, Lowe's, or Microsoft have delivered in recent years — a 2.5% starting yield reaches 11.63% on cost in 20 years. At 12% growth, it reaches 24% in 20 years. These are not speculation; they are arithmetic applied to real compounding rates that real companies have demonstrated over extended periods.
When Yield on Cost Misleads You
YOC is a useful metric but it has real blind spots. Using it incorrectly leads to bad decisions.
It ignores opportunity cost. A stock with 10% YOC on your original $60 purchase price is not automatically better than a new investment at 4% current yield. If that stock is now trading at $300, the relevant question is: if I redeploy $300 into a new investment yielding 4%, do I generate more income per current dollar of capital? In this case: $300 × 4% = $12 in annual income vs. $60 × 10% = $6 from the YOC lens. The new investment generates twice the current income on the same market value. Selling and reinvesting can make economic sense even when YOC looks impressive.
It does not indicate dividend safety. A stock can show an 8% YOC on your original purchase while the business is deteriorating and a dividend cut is approaching. YOC is backward-looking — it tells you what happened, not what will happen. Always pair YOC analysis with current payout ratio, earnings trend, and balance sheet health.
It can justify holding mediocre businesses too long.Anchoring to YOC creates an emotional attachment to positions that may have better alternatives. The question is not “how good is my YOC?” but “is this the best use of this capital going forward?” Sometimes the honest answer is no.
Model dividend growth over time
The Dividend Growth Calculator shows how a stock's income compounds as the company raises its dividend each year — exactly what drives YOC higher over time.
Frequently Asked Questions
What is yield on cost?
Yield on cost is the annual dividend per share divided by your original purchase price (cost basis), expressed as a percentage. It measures the income return on what you actually paid, not on the stock's current market value. It grows over time as companies raise their dividends while your cost basis stays fixed.
How do you calculate yield on cost?
Annual dividend per share ÷ your cost basis per share × 100. Example: bought JNJ at $60, now pays $4.76/year. YOC = $4.76 ÷ $60 = 7.93%. This differs from current yield, which uses today's stock price instead of your purchase price.
Why do long-term investors track yield on cost?
YOC quantifies the compounding reward of holding dividend growth stocks over time. A 2.5% initial yield growing at 8% per year reaches over 11% YOC in 20 years. It also helps investors resist selling appreciated positions when the income on their original investment is significantly higher than available alternatives.
When is yield on cost misleading?
YOC ignores opportunity cost. A high YOC does not mean a stock is the best use of your current capital — if the stock has appreciated significantly, redeploying into a new investment at current yield may generate more income per dollar of today's value. YOC also says nothing about dividend safety or business health going forward.
What is a good yield on cost?
No universal standard, but many long-term dividend investors consider YOC above 6-8% to be the sign of a genuinely rewarding long-term hold — where income return on original capital significantly exceeds current alternatives. Warren Buffett's Coca-Cola position reportedly earns 50%+ yield on cost based on the original 1988 purchase price.