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Yield on cost is a measurement of the amount of return investors get from the dividends on a particular security. Dividends are bonus payments made to investors to reward them for their loyalty, and they are also used by companies to lure new investors. The yield on cost is measured by dividing the dividend per share of a particular stock by the cost per share paid by the investor. It is important to realize that the yield is dependent upon the share price of the security, which can rise and fall over time.
Investors are always concerned about getting the most return from the securities they choose for their capital. In the case of stocks, that return usually comes if the price of the stock rises after it is purchased, thus making the investor's shares more valuable. But dividends, which are occasionally paid out by companies to their shareholders, can also give investors significant profits over time. Calculating the yield on cost is a good way for investors to determine the profit potential of the securities they own.
As an example of yield on cost, imagine that an investor bought 100 shares of stock at a price of a $20 US Dollars (USD) per share. The company that issues the stock pays out a dividend at the end of the year of $1 USD for every share owned. Dividing $1 USD by $20 USD yields a quotient of .05. By converting this into a percentage, it can be determined that the stock yields 5 percent.
Since the cost paid for the shares is a determining factor in yield on cost, the calculation would change if the shares of a certain stock were purchased at different prices on separate occasions. Using the above example, imagine that the same investor built upon his 100 shares at $20 USD per share by purchasing 100 more shares at $30 USD per share. Averaging out the cost paid for all of the shares leaves the total cost per share at $25 USD per share. Plugging this total into the equation, using the same dividend of $1 USD per share, drops the yield down to .04, or 4 percent.
Investors can look at the dividend history of a particular company to attempt to project yield on cost. Companies are under no obligation to pay out dividends, but those companies that have paid them out regularly at a steady rate for a long period of time can generally be expected to continue the practice. Comparing a company's typical dividend payout to its market price can give an investor some estimation of the overall dividend yield he can expect.