The formula, a worked holding over twenty years, and why the figure describes your past purchase rather than the return you can earn today.
Dividend yield on cost is the annual dividend you receive today divided by what you originally paid for the shares, fees included. On an illustrative holding of 100 shares bought for 4,010.00 with a 1.20 dividend growing 6 per cent a year, the yield on cost rises from 2.99 per cent to 5.36 per cent after ten years and 9.60 per cent after twenty, while the shares themselves still yield 3.00 per cent to anyone buying them today.
Worked in full in Stock Market Investing for Beginners by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Yield on cost = annual dividend per share now × shares held ÷ total amount paid for those shares
Excel, with shares in B1, current annual dividend per share in B2 and total cost in B3: =B1*B2/B3
Two details decide whether the figure is right. The denominator is what you actually paid, commissions included, not the price on the screen at the time. And the numerator is the dividend for a full year, so a quarterly payer's latest dividend is multiplied by four, and any special dividend is left out.
| Input | Value |
|---|---|
| Shares bought | 100 |
| Price paid per share | 40.00 |
| Dealing fee | 10.00 |
| Total cost / cost per share | 4,010.00 / 40.10 |
| Annual dividend per share at purchase | 1.20 |
| Dividend growth, a year | 6.0% |
| Dividend yield the market applies to the shares, every year | 3.0% |
The last line is a simplifying assumption: the share price rises in step with the dividend, so a new buyer always gets 3.00 per cent. It keeps the comparison clean.
Year 0: income = 100 × 1.20 = 120.00; yield on cost = 120.00 ÷ 4,010.00 = 2.99%
Year 10: dividend = 1.20 × 1.0610 = 2.15; income = 214.90; yield on cost = 214.90 ÷ 4,010.00 = 5.36%
Year 20: dividend = 1.20 × 1.0620 = 3.85; income = 384.86; yield on cost = 384.86 ÷ 4,010.00 = 9.60%
At 6 per cent dividend growth the yield on cost doubles roughly every 11.9 years, the same arithmetic as any compounding rate. Note that the starting figure is 2.99 per cent, not the 3.00 per cent headline yield, because the 10.00 fee is part of the cost.
After ten years the holding pays 214.90 a year on 4,010.00 of original money. That is a pleasant figure and an honest description of the cash the shares produce against what was put in. It is not a return you can still earn. The same 100 shares are now worth 7,163.39 at 71.63 each, and on that value they yield 3.00 per cent. Ignoring dealing costs and tax, selling them and buying the identical shares back would see the 7,163.39 buy exactly the same 214.90 of income. The 5.36 per cent belongs to the past purchase price; the money now tied up in the shares earns 3.00 per cent.
| Year | Dividend per share | Annual income | Market value | Yield on cost | Current yield |
|---|---|---|---|---|---|
| 0 | 1.20 | 120.00 | 4,000.00 | 2.99% | 3.00% |
| 10 | 2.15 | 214.90 | 7,163.39 | 5.36% | 3.00% |
| 20 | 3.85 | 384.86 | 12,828.54 | 9.60% | 3.00% |
Over the period the investor's total return is roughly the price growth plus the yield, about 9.18 per cent a year in this illustration, and that is the number to compare with other uses of the money.
| Dividend growth | After 10 years | After 20 years | Years to double |
|---|---|---|---|
| 0.0% | 2.99% | 2.99% | never |
| 3.0% | 4.02% | 5.40% | 23.4 |
| 6.0% | 5.36% | 9.60% | 11.9 |
| 9.0% | 7.08% | 16.77% | 8.0 |
If the dividends are reinvested in more shares instead of spent, the share count grows too: 134.39 shares after ten years and 180.61 after twenty in this case. Income measured against the original 4,010.00 then reaches 7.20 per cent after ten years and 17.33 per cent after twenty. Be clear about which version you are quoting. The reinvested figure has had every dividend added back as new money, so it is not comparable with the spent version, and for tax purposes each reinvested dividend usually adds to your cost basis, which this simple ratio ignores. How much reinvested dividends add to returns works that effect through on its own.
Illustrative arithmetic, not a recommendation to buy or hold any share. Dividends are not guaranteed and share prices can fall as well as rise.
Yield on cost is current annual dividend income divided by the total you paid. It is a useful record of how a growing dividend has compounded on your original money, 5.36 per cent after ten years at 6 per cent growth here, but the yield you are actually earning on the money now tied up is the current yield, 3.00 per cent. The book argues for simple, low-cost, long-term investing, and the free workbook for the book puts figures on compounding and on what fees cost over a lifetime.
Dividend yield divides the annual dividend by today's share price; yield on cost divides it by the price you originally paid. In the worked example, ten years after purchase the shares pay 214.90 a year: 5.36 per cent on the 4,010.00 paid, but 3.00 per cent on their current value of 7,163.39. The second figure is the one any new money, or money you leave invested, actually earns.
There is no target level, because the figure depends mainly on how long you have held the shares and how fast the dividend has grown. At 6 per cent dividend growth it doubles in about 11.9 years; at 3 per cent it takes 23.4 years. A high yield on cost says the dividend has grown since you bought, not that the shares are a good holding now.
They can, but say so. If dividends buy more shares, the holding in the example grows to 134.39 shares after ten years and income reaches 7.20 per cent of the original 4,010.00, against 5.36 per cent if the dividends are spent. Each reinvested dividend is new money, so many investors add it to the cost, which brings the ratio back down.
This article is one calculation from Stock Market Investing for Beginners. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
Get the book on Amazon →Free companion files
Also on Amazon UK · Amazon Germany · Amazon France · Amazon Canada
Reading guide: personal finance and investing for beginners → · All 1614 articles →
If this book helped, or didn’t, a few lines on Amazon are worth more than they look: they are what the next reader goes on. Write a review. The workbook stays free either way.