The metric
Current yield answers: what does this stock pay relative to today's price? Yield on cost (YOC) answers a more personal question: what does it pay relative to what I actually paid? YOC = current annual dividend ÷ your original cost per share. Buy at $40, and when the dividend grows to $2.40, your YOC is 6% — even if new buyers at today's price only get 2.5%.
Why it matters
YOC makes dividend GROWTH visible. A stock yielding 2.8% today with a decade of ~8% annual dividend raises will, if raises continue, pay ~6% on your cost in ten years and ~13% in twenty — a raise you receive for doing nothing but holding. This is the engine of dividend-growth investing: buying reliable raisers and letting time convert modest yields into extraordinary personal ones. Model any combination with the Dividend Yield & YOC Calculator.
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The honest criticisms
YOC flatters. It compares today's dividend to a price that no longer exists — your capital is worth today's price, and it could be reinvested at today's yields elsewhere. A 12% YOC feels wonderful, but if the stock now yields 2% and better opportunities exist, YOC alone can rationalize holding. Use it as a REWARD gauge (is this holding delivering the growing income I bought it for?), never as the sole reason to hold. Current yield, payout safety, and growth rate remain the decision metrics.
Picking YOC compounders
The candidates are companies with long raise streaks (25+ year raisers get called Dividend Aristocrats), payout ratios that leave room to keep raising, and businesses whose cash flows grow — because dividends follow cash. It's the discipline Geraldine Weiss pioneered decades ago: buy quality when its yield is historically high, then let raises do the work (Geraldine Weiss profile). Pair with reinvestment early on (Dividend Investing for Beginners) and income snowballs twice — more shares AND bigger payments per share.
FAQ
Does YOC include reinvested dividends?
Classic YOC uses your original cost; some investors track a blended basis including reinvestments — either is fine if you're consistent.
What's a realistic dividend growth rate?
Mature dividend growers have often raised in the mid-single digits to low-double digits annually, but every company differs — check its own history.
Is a high YOC a sell signal?
No — it's a hold-reward signal. Sell decisions should come from valuation, payout safety, and better alternatives.
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