Yield on Cost: Why a DRIP's Income Outgrows the Dividend Rate

A stock's dividend yield is a ratio of two moving numbers: the dividend per share and today's price. Yield on cost uses a different denominator — what you originally paid — so it answers a different question: how much income does this position pay each year, compared with the money that went into it? For a reinvested position that figure can climb well past the stock's market yield, because two separate things grow the numerator: the dividend per share, and the number of shares you hold.

Two Growth Factors Multiply

Yield on cost for a DRIP position is the position's projected annual dividend income divided by the original investment. The DRIP calculator computes it as shares held × the annual dividend per share at the end of the horizon, divided by the initial investment. Both parts of that product grow:

• Dividend per share grows at the dividend growth rate you enter. This happens whether or not you reinvest.
• Share count grows only if you reinvest. Each reinvested payment buys more shares, and the dividend is paid per share.

Starting yield on cost is the current dividend yield. Multiply it by the dividend growth factor and the share growth factor, and you have the ending figure. Reinvestment contributes the second factor and nothing else.

A Worked Example

Assumptions, all entered as inputs and none a forecast: $10,000 invested at $50 per share (200 shares), a 3% current dividend yield, 6% annual price appreciation, dividends reinvested quarterly, held 20 years. Dividend growth is the variable. The table runs the calculator's engine at three growth rates.

Dividend growth	Dividends taken as cash: year-20 income, yield on cost	Reinvested: shares at year 20	Reinvested: year-20 income	Reinvested: yield on cost
0%	$300.00, 3.00%	284.07	$426.10	4.26%
5%	$795.99, 7.96%	344.59	$1,371.47	13.71%
8%	$1,398.29, 13.98%	413.32	$2,889.68	28.90%

Read the 5% row as a product. The dividend per share grows by 1.05^20 = 2.6533, taking 3.00% to 7.96% on the 200 shares that never change. Reinvestment grows the share count from 200 to 344.59, a factor of 1.7230, and 7.96% × 1.7230 = 13.71%. Even with no dividend growth at all (the 0% row), the share count rises by a factor of 1.4203 and lifts 3.00% to 4.26%.

The two factors compound on each other. At 8% growth the dividend factor is 4.6610 and the share factor is 2.0666, so the reinvested position's income ends up more than twice the cash-taker's, not merely a little higher.

Why the Market Yield Looks Different

The same reinvested position, in the 5% row, is worth $55,258.03 at year 20 (the calculator's own output for these inputs). Its $1,371.47 of annual income is 2.48% of that value. That is the market yield on the position, and it is lower than the starting 3% because the share price in this example grows at 6% a year while the dividend grows at 5%. The two measures describe the same income stream against different bases: 13.71% against what you paid, 2.48% against what it is worth now.

Neither number replaces the other. Yield on cost uses the original outlay as its base and market yield uses the current value, so a yield on cost figure is not comparable with another stock's current yield.

What Has to Hold for These Numbers

• The dividend growth rate holds for the full 20 years. The tool assumes the entered growth rate holds and does not model a dividend cut or suspension.
• Reinvestment buys at the price in force each quarter. The engine converts each payment to shares at that period's end price.
• Everything here is pre-tax. In a taxable account, IRS Publication 550 says: "If you use your dividends to buy more stock at a price equal to its fair market value, you must still report the dividends as income." It also says that if a plan sells you stock at a discount, "your basis is the full fair market value of the stock on the dividend payment date." The calculator does not model that tax.
• Share price does not change the dollar results. A higher starting price means fewer shares and a proportionally larger dividend per share, so yield on cost is the same.

Using the Calculator

Enter your own yield, dividend growth rate, price growth rate and horizon in the DRIP calculator; the final yield on cost appears beside the reinvestment and cash-dividend totals. To see the dollar comparison for a similar position, see DRIP vs. Cash Dividends: The Compounding Gap.

Last reviewed: October 2026. This guide is informational only and is not financial, tax, or legal advice. Figures are illustrative outputs of the stated assumptions, not a forecast of any investment's results. — Eric, WealthExact founder

Frequently asked questions

Is yield on cost the same as dividend yield?

No. Dividend yield divides the annual dividend by the current share price; yield on cost divides the annual dividend income by the amount originally invested. In the 5% growth example above, the same position shows 13.71% on cost and 2.48% against its year-20 value.

Why does reinvesting raise yield on cost?

Because the dividend is paid per share, and reinvestment increases the number of shares. In the 5% example the share count rises from 200 to 344.59, which multiplies the income from dividend growth by 1.7230.

Does yield on cost still rise if the dividend never grows?

Yes, but only through reinvestment. With 0% dividend growth, the example's yield on cost goes from 3.00% to 4.26% over 20 years, entirely from the extra shares. Taking the dividends as cash leaves it at 3.00%.

Are reinvested dividends taxed even though I never received the cash?

In a taxable account, yes. Publication 550 says dividends used to buy more stock at fair market value "must still be reported as income." The calculator's results are pre-tax.

This guide is for informational and educational purposes only. It is not financial, tax, or legal advice. Tax rules are complex, fact-specific, and subject to change. Consult a qualified tax or financial professional before making IRA contribution or conversion decisions.

Last reviewed: October 2026 · Against primary sources cited in the body.