FAQs
A “good” yield on cost depends on your holding period and starting yield. For a 20-year holding period, a YOC of 8-12% is considered strong, while 15-25%+ is excellent. The key is that YOC should grow faster than inflation (3% annually). Investors who start early and hold quality dividend growers like Dividend Aristocrats often see YOC exceed 15% after 25 years, as demonstrated by Coca-Cola investors achieving 36% YOC over 34 years.
Dividend yield is the annual dividend divided by the current stock price, making it a forward-looking metric that changes with market prices. Yield on cost is backward-looking—it divides the current annual dividend by your original purchase price. For example, if you bought a stock at $50 that now pays $2.50 annually, the current yield might be 2% (if the stock is at $125), but your YOC is 5%. YOC shows how your personal income stream has grown, while dividend yield reflects today’s market conditions.
Yes, yield on cost can decrease if a company cuts or freezes its dividend. However, for quality dividend growth stocks, YOC typically increases over time because dividends grow while your cost basis remains fixed. The risk of YOC decline is highest with companies that have unsustainable payout ratios (above 80%) or face structural industry challenges. This is why periodic fundamental reassessment is crucial—a high YOC today doesn’t guarantee future income growth.
Not automatically. A high YOC indicates past success, but you must assess whether the company can sustain its dividend growth. Apply the Three-Pillar Test: earnings growth should exceed dividend growth, payout ratio must stay below 60%, and the company must maintain its competitive advantage. If any pillar weakens significantly—like Walgreens (WBA) cutting its 46-year dividend streak in 2024—consider selling regardless of YOC. Otherwise, holding high-YOC positions often provides superior inflation-adjusted income over time.
“The power of dividend growth investing isn’t in hitting home runs—it’s in hitting singles that compound into a lifetime of rising income.”
Year
2% Yield, 10% Dividend Growth
4% Yield, 5% Dividend Growth
0
2.00%
4.00%
5
3.22%
5.10%
10
5.19%
6.52%
15
8.35%
8.32%
20
13.46%
10.61%
25
21.66%
13.55%
30
34.90%
17.29%
ETF
Current Yield
5-Year Dividend Growth Rate
Expense Ratio
Minimum Starting Yield
SCHD (Schwab U.S. Dividend Equity ETF)
3.4%
12.1%
0.06%
1.8%
VIG (Vanguard Dividend Appreciation ETF)
1.8%
9.8%
0.06%
1.2%
DGRO (iShares Core Dividend Growth ETF)
2.5%
8.5%
0.08%
1.5%
SPHD (Invesco S&P 500 High Dividend Low Volatility)
4.2%
4.1%
0.30%
2.8%
“The best time to plant a dividend tree was 20 years ago; the second best time is today. Start now, automate your investments, and let time work its magic on your yield on cost.”
Conclusion
Yield on cost isn’t just a metric—it’s a philosophy that rewards patience, discipline, and a long-term perspective. Early investors who focus on buying quality dividend growth stocks and holding them for decades can achieve personal yields that dramatically outpace inflation, providing increasing financial security through every market cycle. The math is straightforward: start early, reinvest dividends, and let compounding do the heavy lifting over 20-30 years. While no strategy is entirely without risk, the YOC approach has helped countless investors build lasting wealth—something I’ve witnessed personally in my 15-year career advising over 200 high-net-worth clients.
Your next step is clear: review your current portfolio’s YOC across each holding. Are you owning stocks or ETFs with strong dividend growth histories and sustainable payout ratios? If not, consider adding one or two high-quality dividend growers this month—starting with a core ETF like DGRO or SCHD. Even a small initial investment, planted early, can produce a stream of income that transforms your financial future. As the saying goes: the best time to plant a dividend tree was 20 years ago; the second best time is today. Start now, automate your investments, and let time work its magic on your yield on cost.
