Yield-on-Cost (5-Year) % - Definition, Formula & Calculator

What Is Yield-on-Cost (5-Year) %?

Yield-on-Cost (5-Year) % is a forward-looking dividend metric that estimates what an investor’s dividend yield could be five years from now based on the stock’s current dividend yield and its historical dividend growth rate. In practical terms, it asks a simple question: if you bought a stock today and the company continued raising its dividend at roughly the same pace it did over the past five years, what annual yield would you be earning on your original purchase price in year five?

Unlike a standard dividend yield, which only measures the dividend relative to the stock’s current price today, Yield-on-Cost (5-Year) % tries to capture the compounding effect of dividend growth. That makes it especially useful for long-term income investors who care not just about what a stock pays now, but what it may pay later if dividend growth continues.

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The core intuition is straightforward. Two stocks may have the same current dividend yield, but if one company has a much stronger record of increasing its dividend, its future income stream may become much more attractive over time. Yield-on-Cost (5-Year) % is designed to highlight that difference.

GuruFocus historically defines the metric as an estimate based on buying the stock today, holding it for five years, and assuming the company raises its dividend at the same rate it did over the prior five years. Under that assumption, the annual dividends received in five years are measured relative to today’s stock price.

The formula is:

\text{Yield-on-Cost (5-Year)} = \text{Current Dividend Yield} \times (1+\text{Dividend Growth Rate})^5

Key Takeaways

Yield-on-Cost (5-Year) % estimates the dividend yield an investor may earn on today’s purchase price after five years of dividend growth.
It combines a stock’s current dividend yield with its historical dividend growth rate.
The metric is most useful for long-term dividend investors comparing future income potential, not just current income.
A higher value may indicate stronger dividend compounding potential, but only if the company can sustain its dividend growth.
The measure is assumption-driven and can be misleading if future dividend growth differs materially from the past.

How Is Yield-on-Cost (5-Year) % Calculated?

Yield-on-Cost (5-Year) % starts with the stock’s current dividend yield, then projects that yield forward using the company’s historical dividend growth rate over the last five years.

The standard GuruFocus-style formula is:

\text{Yield-on-Cost (5-Year)} = \text{Dividend Yield \%} \times (1+\text{Dividend Growth Rate})^5

Where:

Dividend Yield % is the stock’s current annual dividend divided by its current share price.
Dividend Growth Rate is the historical rate at which the company has increased its dividend.
5 represents the five-year projection period.

You can also think of it in two steps.

First, estimate the future annual dividend per share:

\text{Future Dividend per Share in 5 Years} = \text{Current Dividend per Share} \times (1+\text{Dividend Growth Rate})^5

Then divide that projected dividend by today’s share price:

\text{Yield-on-Cost (5-Year)} = \frac{\text{Future Dividend per Share in 5 Years}}{\text{Current Share Price}}

Because current dividend yield is already equal to current dividend per share divided by current price, the two approaches are mathematically equivalent.

Example calculation

Suppose a stock has:

a current dividend yield of 2.0%
a five-year dividend growth rate of 10%

Then:

\text{Yield-on-Cost (5-Year)} = 2.0\% \times (1.10)^5 \approx 3.22\%

That means an investor buying the stock today would be earning about 3.22% annually on the original purchase price in year five, assuming the dividend keeps growing at 10% per year and the company continues paying it.

This is an important distinction: Yield-on-Cost is based on the investor’s original cost basis, not the stock’s future market price.

Yield-on-Cost (5-Year) % Trend Over Time

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Viewed over time, Yield-on-Cost (5-Year) % can help investors see how a company’s dividend income potential has changed as its current yield and dividend growth profile evolve. A rising trend may reflect faster dividend growth, a higher starting yield, or both. A falling trend may indicate slowing dividend increases, a lower current yield, or a combination of the two.

For dividend-growth investors, the trend can be more informative than a single point-in-time reading. It shows whether the stock is becoming more or less attractive as a long-term income vehicle under the same basic projection framework.

What Does Yield-on-Cost (5-Year) % Tell You?

Yield-on-Cost (5-Year) % tells you how attractive a stock’s future income stream might be relative to the price you pay today. It is not a measure of total return, valuation, or business quality by itself. Instead, it is a focused tool for evaluating the income-compounding potential of dividend-paying stocks.

A higher Yield-on-Cost (5-Year) % generally suggests one of two things:

the stock already offers a relatively high current dividend yield,
the company has been growing its dividend quickly, or both.

That can make the metric useful when comparing dividend stocks with different profiles. For example:

A utility may offer a high current yield but low dividend growth.
A consumer staples or industrial company may offer a lower current yield but faster dividend growth.

Yield-on-Cost (5-Year) % helps investors compare those trade-offs on a common basis.

It is particularly useful for investors who plan to hold shares for many years and care about building a rising income stream. In that context, a stock with a modest current yield can still be attractive if dividend growth is strong and sustainable.

At the same time, investors should not interpret a high Yield-on-Cost (5-Year) % as automatically better. If the projected yield depends on an unusually high historical growth rate that is unlikely to continue, the metric may overstate future income potential.

Limitations of Yield-on-Cost (5-Year) %

Like any projection-based metric, Yield-on-Cost (5-Year) % has important limitations.

First, it assumes the company will continue increasing its dividend at the same rate it achieved in the past. That is often unrealistic. Dividend growth can slow as a company matures, earnings growth decelerates, or management changes its capital allocation priorities.

Second, the metric says nothing about whether the dividend is safe. A company may show an attractive Yield-on-Cost (5-Year) % because it has a high current yield and strong historical dividend growth, but if the payout ratio is stretched or free cash flow is weak, that projected income may never materialize.

Third, it does not account for changes in stock price after purchase. Yield-on-cost is anchored to the investor’s original purchase price, which can be useful psychologically and practically for income planning, but it does not reflect the stock’s current market yield or opportunity cost. A stock may have a high yield on your original cost while offering a much lower yield relative to its current market price.

Fourth, the metric is less useful for companies with irregular dividends, very short dividend histories, or no meaningful pattern of dividend growth. It is generally most informative for established dividend payers with relatively consistent capital return policies.

Finally, Yield-on-Cost (5-Year) % should not be used in isolation. It works best alongside related measures such as dividend yield, payout ratio, free cash flow coverage, earnings growth, and dividend growth history.

Real-World Example

A good way to understand Yield-on-Cost (5-Year) % is to compare two familiar dividend stocks with different income profiles: Coca-Cola and Microsoft.

Coca-Cola has long been known as a classic income stock. It typically offers a higher current dividend yield than many technology companies, but its dividend growth rate is usually more moderate. Microsoft, by contrast, has often had a lower current yield, but for many years it has paired that lower starting yield with faster dividend growth.

For an investor focused only on current income, Coca-Cola may look more attractive at first glance. But for an investor with a five-year or longer horizon, Microsoft’s faster dividend growth can narrow the gap or even make its future yield on original cost more competitive than the current yield suggests.

That is exactly what Yield-on-Cost (5-Year) % is designed to capture. It helps investors compare a “high-yield, slower-growth” stock with a “lower-yield, faster-growth” stock using a common forward-looking framework.

Of course, the result depends heavily on whether future dividend growth resembles the past. That is why investors should pair the metric with an assessment of earnings power, payout sustainability, balance sheet strength, and management’s dividend policy.

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(MSFT)

FAQs

What is a good Yield-on-Cost (5-Year) %?

There is no universal benchmark. A “good” value depends on the investor’s goals, the company’s dividend safety, and the sustainability of its dividend growth. In general, a higher value is more attractive only if the underlying dividend growth assumptions are realistic.

What is the difference between Yield-on-Cost (5-Year) % and related metrics?

Dividend Yield % measures the dividend relative to the stock’s current price today.
Yield-on-Cost (5-Year) % estimates the dividend yield an investor may earn in five years based on today’s purchase price and historical dividend growth.
Dividend Growth Rate measures how fast the dividend has grown historically, but does not incorporate the stock’s current yield.

Yield-on-Cost (5-Year) % combines the starting yield and the growth rate into one forward-looking estimate.

Can Yield-on-Cost (5-Year) % be negative?

In normal use, no. Because dividend yield is not negative and dividend growth is generally expressed as a rate applied to a positive dividend, the metric is usually zero or positive. However, if a company cuts or eliminates its dividend, the projected figure based on past growth becomes less meaningful and may no longer reflect reality.

How should investors use Yield-on-Cost (5-Year) %?

Investors should use it as a screening and comparison tool for dividend stocks, especially when evaluating long-term income potential. It is most useful when combined with dividend safety analysis, payout ratios, cash flow coverage, and peer comparisons.

Related Terms

3-Year Dividend Growth Rate - The annualized rate at which a company has grown its dividend per share over the past three years.
5-Year Dividend Growth Rate - The annualized rate at which a company has grown its dividend per share over the past five years.
Dividend Payout Ratio - The percentage of earnings paid out as dividends to shareholders, indicating how much profit is retained versus distributed.
Dividend Yield - The annual dividend per share divided by the current stock price, expressing dividend income as a percentage of investment.
Dividend-to-FFO Ratio - A payout ratio used for REITs that compares dividends paid to Funds From Operations, a more accurate cash flow measure than net income.
Forward Dividend Yield - An estimate of the next twelve months of dividends divided by the current stock price, based on the most recently declared dividend.

Summary

Yield-on-Cost (5-Year) % is a useful dividend-growth metric that estimates how much annual income a stock could generate relative to today’s purchase price after five years of continued dividend growth. It helps investors look beyond current yield and consider the compounding effect of rising dividends.

That makes it especially relevant for long-term income investors comparing stocks with different combinations of starting yield and dividend growth. Still, because the metric depends on historical growth continuing into the future, it should be treated as an estimate rather than a forecast. The best use of Yield-on-Cost (5-Year) % is as one part of a broader dividend analysis, not as a standalone decision rule.

Sources

GuruFocus legacy term page, “5-Year Yield-on-Cost %” (archival page content provided in prompt)
Investopedia, “Yield on Cost: Definition, Formula, and Examples” — https://www.investopedia.com/terms/y/yield-on-cost.asp
Fidelity, “Dividend Yield and Yield on Cost” — https://www.fidelity.com/learning-center/trading-investing/income-investing/dividend-yield
The Motley Fool, “What Is Yield on Cost?” — https://www.fool.com/investing/how-to-invest/stocks/yield-on-cost/
U.S. Securities and Exchange Commission (SEC), “Beginner’s Guide to Financial Statements” — https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins/how-read