Yield on cost is a valuation metric used to determine the dividend yield based on the original purchase price of an investment, rather than its current market value. For instance, if an investor initially purchased a stock for $50 and it now pays an annual dividend of $5, the yield on cost would be 10%, regardless of the stock’s current trading price.
This metric provides insight into the long-term income generated from an investment, highlighting the potential impact of consistent dividend increases over time. It is particularly useful for assessing the performance of income-generating assets held for extended periods, revealing the return relative to the initial capital outlay and assisting investors in evaluating the success of their investment strategies and the effect of compounding dividend growth over time. Understanding this metric aids in better financial planning.