Two investors can own the same stock and quote different yields, and both can be right. Dividend yield looks at today's price. Yield on cost looks at what you paid. Each answers a different question.
The two formulas
- Dividend yield = annual dividend per share ÷ current share price
- Yield on cost = annual dividend per share ÷ the price you paid per share
A worked example
Say you bought 100 shares at $40 (a made-up company). It pays $1.60 a year in dividends.
| Share price | Dividend a year | Dividend yield | Yield on cost | |
|---|---|---|---|---|
| The day you buy | $40 | $1.60 | 4.0% | 4.0% |
| Price rises to $50 | $50 | $1.60 | 3.2% | 4.0% |
| Dividend raised to $2.00 | $50 | $2.00 | 4.0% | 5.0% |
In the second row the stock got more expensive, so a new buyer earns a lower yield than you do. In the third, the company grew its dividend and your yield on cost rose to 5.0% even though you did nothing.
When each one is useful
- Dividend yield is the right yardstick when deciding whether to buy more, or comparing holdings: it tells you what a dollar invested today would earn.
- Yield on cost is the right yardstick for how your own income is growing relative to what you put in. It rewards patience and dividend growth.
What neither tells you
- A high dividend yield can be a warning. If the price falls sharply, the yield rises. A very high yield sometimes means the market expects a cut.
- Yield on cost ignores the price. A holding can have a lovely yield on cost and still have lost money since you bought it. Look at total return too, which includes price change and dividends.
- Neither is guaranteed. Both assume the dividend continues at its current rate.
For reinvested dividends, your cost per share changes with each reinvestment, so a tracker has to work from the actual trades. Nimblewit's Income tab shows yield on cost and the yield on today's value side by side; see the dividend tracker.