When you are able to buy a stock at a fair value with a solid track record of dividend increases, you can end up with very good total return and the concept of yield on cost helps you with that.
Simply put, yield on cost measures the rate of dividend income your original investment earns today. Put another way, yield on cost is essentially the dividend yield based on your initial investment in a stock.
If a company increases its dividend after you purchased shares, you will enjoy a higher rate of income return on your original investment – your yield on cost rises.
Dividend investors like tracking the yield on cost of their holdings to see the power of consistent dividend growth. It is exciting to see an investment literally begin to pay for itself with higher dividend income over time.
Let’s try an example. Suppose I bought 50 shares of Colgate at $55 per share. The stock currently trades at $70 and pays annual dividends of $1.56 per share.The company’s dividend yield would be 2.2% ($1.56 per share in dividends / $70 current stock price).However, my yield on cost would be 2.8% ($1.56 per share in dividends / $55 cost basis per share).If Colgate raised its dividend by 8% to $1.68 per share, my yield on cost would rise to 3.1% ($1.68 per share in dividends / $55 cost basis per share).
Yield on cost increases when a company raises its dividend and decreases when a company cuts its dividend.
The key element in this logic of dividend growth investing is to be patient and let your winning stocks run. Very often investors pull the sell trigger to soon and buy stocks of average quality.
Be patient and let the compounding do the work
In One of my accounts I bought Appl shares at a 65$ cost basis in 2013. Current yield is 1.57% (2.52 $ dividend per year @ 160$/share) , but my yield on cost is amazing !!! it’s a whopping 3.87% (2.52$/65)