Yield on Cost (YOC) Explained: How Dividend Growth Multiplies Income

Yield on Cost

By ATGL

Updated February 16, 2026

Table of Contents

Yield on Cost—often abbreviated as YOC—is one of the most powerful yet frequently misunderstood concepts in dividend investing. While many investors focus only on a stock’s current dividend yield, Yield on Cost shifts the perspective from “What does this stock pay today?” to “What does this investment pay relative to what I originally invested?”
This subtle change in viewpoint transforms how investors evaluate long-term income growth, entry timing, and the compounding power of reinvested dividends.

What Is Yield on Cost?

Yield on Cost measures the annual dividend income generated by an investment divided by the original purchase price, not the current market value.

Basic Formula:

Yield on Cost=Annual Dividend per ShareOriginal Purchase Price per Share\text{Yield on Cost} = \frac{\text{Annual Dividend per Share}}{\text{Original Purchase Price per Share}}Yield on Cost=Original Purchase Price per ShareAnnual Dividend per Share

If you purchased a stock at $50 per share and it pays $2 annually in dividends, your initial Yield on Cost is:

250=4%\frac{2}{50} = 4\%502=4%

But the real power of YOC appears over time, as companies increase their dividends. If that same dividend grows to $4 annually ten years later, your Yield on Cost becomes:

450=8%\frac{4}{50} = 8\%504=8%

The market price may have risen to $120 or fallen to $90, but your Yield on Cost remains anchored to the original entry price, which is why disciplined entry and dividend growth are so critical.

Yield on Cost vs. Current Yield

Many investors confuse Yield on Cost with Current Dividend Yield. They are related but serve different purposes.

Metric	What It Measures	Best Used For
Current Yield	Dividend ÷ Current Price	Comparing new investment opportunities
Yield on Cost	Dividend ÷ Original Price	Measuring long-term income growth

Current Yield is a forward-looking metric.
Yield on Cost is a historical performance metric.

YOC does not help you decide whether to buy a stock today. Instead, it helps you understand how effectively your past investment decisions are compounding income over time.

Why Yield on Cost Matters

It Highlights Dividend Growth Power
A company that raises dividends consistently transforms modest starting yields into substantial income streams. What begins as a 2.5% yield can become 7–10% over a decade if dividend growth is steady.
It Rewards Disciplined Entry Timing
Lower entry prices amplify Yield on Cost. Two investors buying the same stock at different prices can experience dramatically different income outcomes even if the dividend per share is identical.
It Encourages Long-Term Thinking

Yield on Cost reinforces patience. Rather than chasing short-term price fluctuations, investors begin focusing on sustainable dividend growth and business durability.

Numerical Illustration – Entry Price Efficiency

Consider two investors purchasing the same dividend-growing company.

Company Profile

Starting Dividend Yield: 3%
Annual Dividend Growth Rate: 7%

Investor A

Entry Price: $100
Initial Dividend: $3

Investor B

Entry Price: $85
Initial Dividend: $3

After 10 years of 7% dividend growth, the dividend rises to approximately $5.90 per share.

Investor	Original Price	Dividend After 10 Years	Yield on Cost
A	$100	$5.90	5.9%
B	$85	$5.90	6.9%

The dividend itself is identical.
The entry efficiency creates the difference.

Over decades and larger portfolios, this seemingly small gap compounds into meaningful income divergence.

Yield on Cost and Dividend Reinvestment

Yield on Cost becomes even more powerful when paired with Dividend Reinvestment Plans (DRIPs). Reinvesting dividends increases share count, which increases total dividend income, which then increases effective Yield on Cost at the portfolio level.

This creates a compounding loop:

Dividends buy additional shares
Additional shares generate more dividends
More dividends accelerate portfolio income growth

Even without additional capital contributions, reinvestment alone can double or triple long-term income.

Yield on Cost and Dividend Aristocrats

Companies known as Dividend Aristocrats—those with decades of uninterrupted dividend increases—demonstrate Yield on Cost’s full potential. Investors who purchased these companies years earlier often experience YOC figures exceeding 15–20%, even though the current yield for new buyers might only be 2–3%.

This illustrates a key principle:

Yield on Cost is not about finding the highest starting yield.
It is about finding sustainable dividend growth.

Limitations of Yield on Cost

While Yield on Cost is a powerful motivational and analytical tool, it should not be used in isolation.

It Can Create Emotional Attachment
Investors sometimes hold underperforming stocks simply because their YOC looks impressive. The market, however, values companies based on future prospects, not past purchase prices.
It Does Not Reflect Opportunity Cost
A stock may show a 10% Yield on Cost, but if its growth prospects are declining while another investment offers stronger fundamentals, holding solely for YOC may reduce overall portfolio performance.
It Should Not Replace Current Yield Analysis

When evaluating new opportunities, current yield and dividend sustainability metrics remain more relevant than historical YOC.

Yield on Cost and Portfolio Strategy

A balanced dividend portfolio often blends:

Core Holdings: Long-term dividend growers where Yield on Cost steadily rises
Satellite Positions: Opportunistic additions with moderate growth potential
Reinvestment Discipline: Selective DRIP usage based on valuation and trend structure

Yield on Cost becomes a progress indicator rather than a decision driver.

Behavioral Advantages

Yield on Cost provides psychological benefits as well:

Encourages patience during market volatility
Reinforces long-term investment discipline
Reduces impulse selling during temporary downturns

When investors see income growing year after year, they are less likely to react emotionally to short-term price movements.

Practical Takeaways

Prioritize Dividend Growth Over High Yield
Entry Price Matters – disciplined buying improves long-term results
Reinvestment Accelerates Compounding
Monitor Fundamentals, Not Just YOC
Use YOC as a Progress Metric, Not a Purchase Signal

Final Perspective

Yield on Cost is best understood as a long-term income lens. It tells the story of how effectively your investments are transforming initial capital into recurring cash flow. When paired with dividend growth, disciplined entry timing, and reinvestment strategy, Yield on Cost becomes one of the clearest illustrations of compounding in action.

It is not a tool for predicting the future.
It is a measurement of how wisely the past has been structured—and how powerfully that structure can shape the future of income-oriented investing.

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