When I first came across the term yield on cost I glazed over a bit. Sounds like something an accountant throws at you to make themselves seem clever. But once I actually understood what it meant it became one of the more useful things I look at when thinking about dividend investments.
So What Actually Is Yield on Cost?
Yield on cost, often shortened to YOC, is a way of measuring the return you’re getting on what you originally paid for a stock. Not what the stock is worth now. What you actually paid for it.
The calculation is simple. You take the annual dividend per share and divide it by the price you paid when you bought in. That gives you your yield on cost as a percentage.
So if you paid £10 per share and the company now pays £1 per share in dividends each year, your yield on cost is 10%. Even if the stock is now trading at £20 and the official dividend yield shown on a broker’s website is only 5%, your personal yield on cost is still 10% because you bought at £10.
That gap between what the market says the yield is and what you’re actually getting on your money is the whole point of it.
A Real Example to Make It Click
Say you bought shares in a solid UK company back in 2015 at £5 each. At the time the dividend was 20p per share, so the yield was 4%. Not bad.
Fast forward to now and the company has grown. The share price has gone up to £12. The dividend has grown too, now paying 50p per share. On the current price that’s a 4.2% yield, roughly the same as before.
But your yield on cost? You’re still getting that 50p dividend on your original £5 investment. That’s a 10% yield on what you actually paid. That’s a completely different story to what anyone buying in today would get.
This is why long term dividend investors get so attached to their holdings. The longer you hold a growing dividend stock, the better your yield on cost gets. The stock market doesn’t care about your personal purchase price, but your YOC keeps ticking up every time the company raises its dividend.
How Is It Different to the Normal Dividend Yield?
The dividend yield you see on any broker platform or finance website is based on the current share price. It changes every day as the price moves. It tells you what return you’d get if you bought in right now.
Yield on cost is personal. It’s based on what you paid. Two people can own the same stock and have completely different yields on cost depending on when they bought in.
Neither is better than the other. They’re just measuring different things. Current yield tells you about today. Yield on cost tells you how your original investment is actually performing.
What About Reinvesting Dividends?
This is where it gets really interesting and honestly where most people leave serious money on the table without realising it.
When a company pays you a dividend you’ve got two choices. Take the cash and spend it, or put it straight back in and buy more shares. Most people take the cash. And I get it, money in your account feels good. But reinvesting is where the magic actually happens.
Here’s a rough example to show what I mean. Say you put £10,000 into a dividend stock paying a 4% yield. That’s £400 in dividends in year one. If you just take that £400 and spend it, next year you’re still working off your original £10,000 and still getting roughly £400.
But if you reinvest that £400, you now have £10,400 working for you. Next year your 4% comes off £10,400, so you get £416. You reinvest that. Now you’ve got £10,816. The year after that your dividend is a bit higher again. And so on.
Doesn’t sound like much in year two or three. But give it ten years and the difference between reinvesting and not reinvesting is genuinely significant. Give it twenty years and it’s a completely different outcome. The numbers start to look almost unreal after a couple of decades of compounding, which is why people who’ve been doing this a long time get almost over the top about it.
And here’s the bit that ties back into yield on cost. Every time you reinvest your dividends and buy more shares, those new shares start earning dividends too. Your total dividend income goes up. Which means next time you reinvest there’s more to put in. It builds on itself over and over.
Meanwhile if the company keeps growing and increases its dividend each year, which the best dividend stocks tend to do, your yield on cost keeps creeping up at the same time. The combination of reinvesting and dividend growth is what turns a decent investment into a brilliant one over the long run.
The practical bit: most investment platforms let you set up something called a DRIP, which stands for Dividend Reinvestment Plan. You switch it on and it automatically buys more shares with your dividends each time they’re paid. You don’t have to do anything. It just happens in the background.
Not every platform offers it and not every stock is eligible, but it’s worth checking when you open an account. The less you have to think about it the more likely you are to actually stick to it, and sticking to it is the whole game with compounding. The people who do best with this stuff aren’t necessarily the ones who pick the best stocks. They’re the ones who leave it alone long enough for compounding to do its thing.
I know it sounds boring. Reinvest dividends, wait, repeat. But boring over twenty years beats exciting over two every single time.
Is a High Yield on Cost Always a Good Sign?
Usually yes, but not always. A high YOC means you bought well and the dividend has grown. Both good things.
But you do need to keep an eye on whether the company can actually afford to keep paying the dividend. A company paying out more than it’s earning in profit to maintain that dividend is eventually going to have to cut it. When that happens the share price usually drops too. So check the dividend is covered by earnings before you get too comfortable.
Also worth remembering that yield on cost doesn’t factor in whether the share price itself has gone up or down since you bought. A brilliant YOC on a stock that’s lost half its value isn’t necessarily something to celebrate.
Should You Use It?
I think it’s a useful number to know, especially if you’ve been holding dividend stocks for a while. It gives you a truer picture of what your original money is actually returning. And it’s genuinely motivating when you see what compounding dividends over years actually does to that number.
It won’t tell you everything. No single metric does. But as part of how you track your portfolio it’s worth paying attention to.
This article is for informational and educational purposes only and does not constitute financial advice. Always do your own research and speak to a qualified financial adviser before making any investment decisions.