Yield on cost: the dividend number worth tracking

Here is a question that trips up almost every income investor I have ever met. You own a share you bought years ago. It has been paying you a rising dividend the whole time, and somebody asks what it yields. You glance at the finance app, read the number off the screen, and repeat it back. Reasonable. Also wrong, or at least answering a different question than the one in your head. The number on the screen is the quoted yield, and that figure has long since forgotten you exist. The number that actually describes your position is the yield on cost, and almost nothing bothers to show it to you.

Let me fix that.

What yield on cost actually is

Yield on cost is the dividend a holding pays you now, measured against what you actually paid for it, rather than what it costs a stranger to buy today. That is the whole idea, and the entire trick lives in the denominator.

Picture a share you bought for £1,000. Back then it paid you £40 a year, so it yielded a tidy 4 per cent, and everyone was happy. Fast forward a few years. The business has done well, the price has doubled, and the dividend has grown to £80. Anyone buying it today pays £2,000 for that £80, so the quoted yield on the screen still reads 4 per cent. Looks like nothing changed. But you did not pay £2,000. You paid £1,000, and that same holding now hands you £80 a year. So your yield on cost is 8 per cent. It has been climbing the entire time while the headline number sat there at a flat 4.

Dividend yield on cost, to give it its full and slightly clumsy name, is just this year’s income divided by your original cost basis. It is the income your past self bought, priced in the money you actually spent to get it.

Why it differs from the quoted yield

The quoted yield is a number about the share. Yield on cost is a number about YOU. That is the bit the finance industry tends to mush together, and the mush is not an accident, because a single screaming yield figure is much easier to put on a tile than the truth.

The quoted yield resets every single day, because the price in its denominator moves every single day. It is built for a buyer deciding what to do this afternoon, and for that buyer it is exactly the right tool. Your yield on cost does the opposite. The denominator is frozen at whatever you paid, so the only thing that can move it is the dividend itself. When a company you have held for a decade keeps nudging its payout higher, the quoted yield can drift sideways forever while your yield on cost quietly compounds into something the headline number would never let you see. One figure measures the share’s mood today. The other measures how good a decision you made years ago and how well it has aged.

Both are real. They just answer different questions, and confusing them is how people end up selling a brilliant long-term income payer because its quoted yield looks unremarkable to somebody who never owned it.

Why it lives or dies on an accurate cost basis

Here is the catch, and it is a real one. Yield on cost is only ever as honest as the cost basis underneath it, and cost basis is precisely the thing most people get fuzzy about over a long holding period.

Think about how a real position actually forms. You did not buy it once. You bought a slug here, topped up there, reinvested a few dividends, maybe trimmed a bit when you needed cash. Every one of those events moves the true number you have sunk into the holding, and if your record of them is vague then your yield on cost is a confident-looking fiction. A holding does not have one purchase price. It has a stack of tax lots, and what counts as your cost depends on which of them you are still holding and how you account for the ones you have sold. Run it FIFO and the oldest, cheapest lots leave the book first; average it and the whole pile blends into one figure. Those two methods can hand you genuinely different cost bases for the same shares, which means genuinely different yields on cost. If that distinction is new to you, our piece on FIFO versus average cost basis is the place to start.

This is exactly why a derived number beats a number you eyeball. When the book tracks every buy, every reinvestment and every partial sell as proper tax lots, the cost basis is something the software can stand behind, and the yield on cost derived from it means what it says. Type the trades in once, keep them honest, and the awkward arithmetic of “what did this actually cost me by now” stops being your problem. Strata keeps that ledger of lots and derives the dividend view on top of it, so it can show yield on cost per holding and across the whole book without you ever opening a spreadsheet to reconstruct what you paid in 2019.

The honest caveat: it is a story about the past

Now the part the income-investing forums tend to skip, so brace yourself, because I am about to argue against my own favourite number.

A high yield on cost is a trophy, and a trophy is a record of something you already won. It tells you the past decision was a good one. It tells you almost nothing about whether holding the share for the next ten years is a good one. The denominator is frozen at a price from years ago, which is wonderful for flattery and useless for a forward-looking decision. The market does not care what you paid. The only money genuinely on the table today is the current value of the holding, and the real question is whether that capital, sitting where it is right now, is better off staying put or working somewhere else.

Lean on yield on cost alone and you walk straight into the classic trap: clinging to a mediocre business purely because it has been generous to you, while it quietly underperforms a plainer holding you could own instead. A glittering 8 per cent on cost can be paying you out of a company slowly going nowhere, and the warm feeling of that number is precisely what stops you noticing. Yield on cost is a scoreboard for decisions already made. It is not a reason to hold, and it should never be the only number in the room when you decide what to keep. That is the kind of thing a proper sit-down with the whole book is for, which is most of the point of a quarterly portfolio review.

So hold the two thoughts at once. Yield on cost is the figure that finally shows what your long-held income payers are really doing for you, and the quoted yield will keep that achievement hidden if you let it. It is also a rear-view mirror, and you do not steer with one of those. Track it, enjoy it, learn from it, and then make the hold-or-sell call on what the position is worth and earns today.

If you want the number that the headline yield keeps hiding, derived from a cost basis you can actually trust, you can build your portfolio and see your yield on cost, per holding and across the book, from the trades you already wanted a record of.