Dividendy
Yield on Cost: What It Really Tells You About the Return on Your Original Investment
Key takeaways
- Yield on cost = annual dividend divided by the original purchase price (not the current price).
- It grows with every dividend increase — rewarding patient investors.
- Comparing funds by yield on cost is meaningless — every investor has a different entry point.
- A high yield on cost does not necessarily mean a good future return.
- It is a personal and motivational metric, not a comparative one.
Yield on cost (YOC) is the dividend yield calculated against your original purchase price, not the current market value. If you bought shares for CZK 1,000 and the company now pays an annual dividend of CZK 80, your yield on cost is 8% — regardless of whether the shares are currently worth CZK 3,000.
How YOC is calculated
The formula is straightforward: YOC = annual dividend / average purchase price × 100. If you have been buying gradually via DCA, you use the weighted average of purchase prices. The metric grows every year the company raises its dividend — and that is precisely what makes it interesting for long-term investors.
- In year 1, the company pays a dividend equal to 2% of the purchase price.
- Each year it increases the dividend by 7%.
- After 10 years, your YOC is approximately 4%; after 20 years, over 7%.
- That is why time is said to be the greatest dividend lever — see the power of compound interest.
Limitations of the metric
A high YOC says nothing about future returns. The company may have appreciated so much since your purchase that the current dividend yield is only 1.5% — a new investor gets far less. Moreover, if the company freezes or cuts its dividend, your YOC falls regardless of your purchase price.
If you are interested in companies with a long history of growing dividends, read the article on dividend aristocrats.
FAQ
What is yield on cost in simple terms?
The dividend yield calculated against your original purchase price, not the current market value. If you bought for CZK 1,000 and the company now pays CZK 50 in dividends, your yield on cost is 5% regardless of today's share price.
Why does yield on cost grow?
It grows if the company regularly increases its dividend. Every dividend hike raises the proportion relative to your fixed purchase price. For dividend aristocrats with 25+ years of growth, a long-term investor's YOC can reach double digits.
Can I compare funds or stocks using YOC?
No. YOC is a personal metric that depends on each investor's entry point. To compare funds, use the current dividend yield or total return over a comparable period.
What is a good yield on cost?
It depends on your strategy. Long-term dividend investors aim for a YOC above 5–8% after 15–20 years. But a high YOC today says nothing about the return you will achieve in the future — what matters is whether the company maintains and grows its dividend.