Yield on Cost

Yield on cost is an annual dividend amount divided by the investor’s stated acquisition cost, expressed as a percentage. It describes income relative to a historical cost basis. It is not the same as current dividend yield, which uses the current market price.

A yield-on-cost calculation

Suppose a hypothetical investor bought shares at $20 each and the current annual dividend is $1.50 per share. Yield on the stated original cost is 7.5%: $1.50 divided by $20.

If the market price is now $30, current dividend yield is 5%: $1.50 divided by $30. The same holding has two different percentages because the denominators answer different questions. Fidelity’s dividend-yield explanation describes the current-price calculation.

Define the cost basis used

For a single purchase, the denominator may be straightforward. Multiple purchases, fees, reinvestment and tax-basis adjustments make the phrase original cost less clear. State the method rather than presenting a percentage with no explanation.

For a simplified holding bought in two equal-sized purchases at $20 and $30, the average purchase price is $25 before fees or other adjustments. A $1.50 annual dividend produces 6% on that average cost, not 7.5%. Choosing only the earliest purchase price would describe that lot rather than the whole holding.

What yield on cost leaves out

It does not measure the change in market value. A holding can have a high yield on historical cost while also suffering a price loss, or a low current yield after substantial price appreciation. Income and capital movements both matter when describing performance.

For broader evaluation, FINRA’s performance guide explains total return. Do not add a yield-on-cost percentage to a price-return percentage calculated on a different basis.

Use it as history, not a hurdle

Yield on cost can illustrate how dividends have developed since a purchase. It does not determine the return available from today’s market value or justify keeping an investment regardless of its outlook. Review current earning power, the current dividend and the capital still at risk. A pleasing historical denominator cannot repair weakening future income support.

This article is for education and information, not individualized investment, tax, or legal advice.