Yield vs. yield on cost
By Frank Morales · Updated
Yield is the first number people look at, and the easiest to misunderstand. There are really two yields that matter, and they answer different questions. Knowing the difference keeps you from chasing the wrong thing.
Current yield
Current yield is the annual dividend divided by today's share price. If a $100 share pays $3 a year, the yield is 3%. It tells you how much cash a new buyer would earn right now. It's the number you'll see quoted everywhere.
Yield on cost
Yield on cost is the annual dividend divided by what you originally paid. If you bought that share years ago at $60, and it now pays $3, your yield on cost is 5%. It tells you how much cash your actual investment is earning, regardless of where the share price has gone since.
Illustrative example
Why the difference matters
Current yield helps you compare what you'd earn if you bought today. Yield on cost shows the reward for holding and for the dividend raises that came with time. A company that raises its dividend year after year can turn a modest starting yield into a generous one on your original dollars.
This is why long-term holders often care less about today's yield and more about whether a company can keep raising its payout. The raises are what build yield on cost over time.
The trap is buying a high current yield without checking whether it's safe. A yield can look high because the share price has fallen, not because the dividend is strong. That's the subject of the yield traps lesson.
Dividend Snowball is for educational purposes only and is not investment advice. Projections are estimates based on assumptions, not predictions. Dividends can be cut, returns vary, and past dividend raises don't guarantee future ones.
Side-by-side comparison
| Metric | Take the cash | Reinvest (DRIP) |
|---|---|---|
| Uses | Today's share price | Your original purchase price |
| Tells you | What a new buyer earns now | What your investment earns |
| Example ($3 div) | 3% at $100 price | 6% at $50 purchase price |
Illustrative example. Actual yields and prices vary.
Frequently asked questions
What is the difference between yield and yield on cost?
Current yield uses today's share price and tells a new buyer what they'd earn now. Yield on cost uses your original purchase price and tells you what your actual investment is earning. The same dividend can produce a different number for each.
Which yield should I care about?
Current yield helps you compare what you'd earn if you bought today. Yield on cost shows the reward for holding and for dividend raises over time. Long-term holders often focus on yield on cost and whether a company can keep raising its payout.
Can yield on cost go down?
Yield on cost falls if a company cuts its dividend, since the payout shrinks while your purchase price stays fixed. It rises when dividends grow. A cut hurts both current yield and yield on cost.