Yield on Cost
What It Is:
How It Works/Example:
To calculate yield on cost, divide the annual dividend by the per-share price you initially paid. You can use the trailing twelve month dividend or estimate what the dividend will be during the next twelve months.
For example, let's assume you bought Stock XYZ for $10 per share. XYZ pays a $1 annual dividend, and since your purchase, the price of the stock has increased to $15 per share.
The current dividend yield of the stock is $1 / $15 = 6.7%. But the yield on cost, i.e. the yield on your investment, is $1 / $10 = 10%.
Now assume that XYZ boosts its divided to $1.50 per share. Your yield on cost has increased to $1.5 / $10 = 15%, and the current yield is now $1.5 / $15 = 10%.
If the number of shares you own doesn't change (either by a dividend reinvestment plan or by buying additional shares at another price), your yield on cost will increase as the annual dividend per share increases.
Why It Matters:
Yield on cost is highly relevant to individual investors, but it is often overlooked in favor of current dividend yield. A company that is able to consistently grow dividends can be a great investment for individual investors, who see their yield on cost increase as the dividend payout grows.
A downside to yield on cost is that it can get confusing to calculate the original cost of shares if you are constantly reinvesting dividends as part of a dividend reinvestment plan (DRP or DRIP).