Yield on cost

Yield on cost is the income a position pays now, measured against what you paid for it rather than what it is worth today:

yield on cost = dividends over the trailing period / cost basis

The only difference from dividend yield is the denominator: cost basis instead of current value.

What it tells you

It tells you how the income from a position has grown relative to your original outlay. A holding bought years ago at a 3% yield, whose dividend has since doubled while its price also rose, might show a 3% current yield and a 7% yield on cost.

That is a real fact about your position. The income stream you bought has grown, and the number captures it in a way current yield cannot, because current yield keeps rebasing to a price that also rose.

Why it is a poor decision tool

Yield on cost is anchored to a price that no longer exists.

The question of whether to keep holding something depends on what it is worth now and what it pays now, because that is the capital you currently have tied up in it. What you paid in 2019 has no bearing on that choice. It is a sunk cost in the strict sense.

The failure mode is specific and common: a position with a high yield on cost feels productive, and the number keeps rewarding you for a purchase you made years ago, which makes it easy to hold on past the point where you would otherwise. The higher the yield on cost, the stronger the pull.

For a like-for-like comparison against anything else you could hold, current yield is the number to use. Yield on cost is best read as a record of how an income stream has developed, not as a signal.

A mechanical note

Because the denominator is cost basis, anything that changes cost basis changes this figure without any change in income. Buying more at a higher price will lower your yield on cost even if every holding pays exactly what it did before.