Yield on Cost, A Misleading and Meaningless Term

Companies paying a sustainable and consistently growing dividend are considered the holy grail of dividend investing. This has led some bloggers to coin the term yield on cost as a method to keep track of their dividend returns.

Yield on cost is calculated by dividing current dividend income by the dollar amount originally paid to purchase the stock. As corporations grow their dividends the yield on your original investment grows.

Say for example you purchase 100 shares of a stock at $10 a share, yielding $10 every quarter, and so you’re getting a 4% yield. And your yield on cost is 4%
5 years later after some dividend increases the shares are paying $16 every quarter so you are getting a 6.4% yield on cost

However this term fails to take inflation into account. This makes yield on cost totally meaningless. Worse it makes it misleading.

The above example used 5 years, but what if you do not know how many years have passed for this yield on cost calculation, doesn't that make it meaningless?

Say we bought one Enbridge share for a split adjusted $1.72 in 1981, our yield on cost today would be a whopping 100%. Big number, but what does it tell you.... nothing. The shares were bought using 1981 dollars. The yield on cost does not care to take this into account.  In today’s dollars your investment is worth $50 and your current yield is 4%.

Yield on cost is a useless feel good number because it ignores inflation. a more useful number would be yield on real cost.