Yield on Cost: The Hidden Metric That Makes Long-Term Dividend Investing So Powerful
Yield on Cost (YoC) is one of the most important — and most misunderstood — metrics in dividend investing. While standard dividend yield tells you what a stock pays relative to today's market price, Yield on Cost tells you what a stock pays relative to your original purchase price. For long-term dividend investors, this is the number that truly matters.
The Formula
Yield on Cost = Annual Dividend Per Share ÷ Original Purchase Price Per Share × 100
Example: You buy Coca-Cola at $40/share in 2010 when it pays $0.88/year (2.2% yield). By 2025, KO pays $1.84/year. Your Yield on Cost = $1.84 ÷ $40 = 4.6% — more than double your original yield, without any additional investment.
The Rule of 72 Applied to Dividend Growth
The Rule of 72 is a shortcut to calculate how long it takes for a quantity to double at a fixed growth rate: divide 72 by the growth rate. Applied to dividends: at 8% annual dividend growth, your dividend income doubles every 9 years (72 ÷ 8 = 9). At 12% growth, it doubles every 6 years.
This means that a dividend growth stock with a starting yield of 3% and 10% annual dividend growth will have a Yield on Cost of:
- After 7 years: ≈ 5.8%
- After 14 years: ≈ 11.3%
- After 21 years: ≈ 21.9%
No high-yield stock can compete with these numbers over a 20+ year timeframe — especially when they're generating income on your original purchase price, not today's inflated market values.
Building a High Yield on Cost Strategy
Focus on companies with: a) 5+ years of consecutive dividend increases, b) dividend growth rate above 7% annually, c) payout ratio below 60%, and d) strong competitive moat. Dividend Aristocrats are the natural starting point.
Model your Yield on Cost trajectory with our Snowball Simulator.
Disclaimer: Past dividend growth rates are not guarantees of future performance.