Yield on cost as a long-term strategy: why it matters more than current yield in Canada

After 10 years of owning a dividend grower, your brokerage still shows you the same number it shows a first-time buyer: current yield. That number tells you what the stock pays relative to today's price. It does not tell you what your original $20,000 is actually earning.

Yield on cost is the number that answers that question. It measures your annual dividend income as a percentage of what you paid — not what the stock trades at today. For Canadian investors building long-term income, this distinction changes how you evaluate a holding, when you sell, and which accounts you use.

A holding with a 3.00% current yield and 10 years of 7% annual dividend growth behind it is paying roughly 5.90% on the original purchase price. Add another decade and that number reaches 11.60%. The person who bought yesterday earns 3.00%. You earn 11.60% on your original capital. That gap is not hypothetical. It compounds.

Why Current Yield Misleads Long-Term Holders

Current yield is calculated fresh each day: annual dividend divided by today's share price. If the price rises faster than the dividend grows, yield can fall even when your income is rising. That is not a problem for a new buyer who cares what the stock yields today. It is actively misleading for a long-term holder trying to assess whether to keep or replace a position.

Imagine a Canadian utility bought at $30 per share, paying $1.20 annually — a 4.00% yield at purchase. Over eight years, the company grows its dividend 5% annually and the share price appreciates to $52. Today's current yield is roughly 2.68%. On a screener, this stock looks like it has gotten worse. To a long-term holder, it is paying 6.10% yield on cost on the original $30.

Replacing that holding with a new 4.00% yielder means giving up 2.10 percentage points of yield on your original investment — permanently. You would also trigger capital gains tax on the $22 per share of appreciation. In a non-registered account, at the 50% capital gains inclusion rate under 2026 Ontario tax rules, that creates a real cost that must be factored into the decision.

Yield on cost does not mean hold forever. It means the cost of replacing a mature dividend grower is higher than current yield comparisons suggest.

How to Calculate Yield on Cost

The formula is straightforward:

Yield on Cost = (Annual Dividend per Share ÷ Cost Basis per Share) × 100

Cost basis per share is your adjusted cost base (ACB) — the average price paid across all purchases, including reinvested DRIP shares. In Canada, DRIP shares acquired through broker reinvestment programs add to your ACB at the price they were purchased, which matters significantly when you eventually sell.

A worked Ontario example:

• Original purchase: 200 shares at $28.00 = $5,600
• Annual dividend at purchase: $1.12 per share (4.00%)
• Eight years later: dividend grown to $1.66 per share (7% annual growth, compounded)
• DRIP has added 22 additional shares over that period
• Total shares: 222
• ACB: approximately $6,140 (original $5,600 plus DRIP share cost)

Annual income today: 222 × $1.66 = $368.52 Yield on cost: $368.52 ÷ $5,600 = 6.58%

That 6.58% is what the original $5,600 earns annually — before tax, and without deploying a dollar of new capital since the original purchase. Current yield on the same stock at a $50 share price would show 3.32%.

The DRIP Engine Simulator can model how DRIP share accumulation compounds effective yield on cost over time, including the Price Creep risk that can interrupt reinvestment before it compounds fully.

Yield on Cost and Account Placement in Canada

Where you hold a dividend grower changes what yield on cost actually delivers.

TFSA: Yield on cost growth is fully sheltered — every percentage point compounds without tax leakage. A 7.00% yield on cost in a TFSA delivers 7.00% after tax. This makes the TFSA the strongest account for long-dated dividend growers where yield on cost appreciation is the primary return mechanism. The 2026 TFSA annual contribution limit is $7,000, with $102,000 in cumulative room for investors eligible since 2009.

RRSP: Income compounds sheltered, but withdrawals are taxed as ordinary income in retirement. For eligible Canadian dividends, this is generally worse than non-registered treatment because the dividend tax credit is lost on withdrawal. Yield on cost growth in an RRSP is efficient during accumulation but carries a future tax cost.

Non-registered: Each year's income is taxed, but eligible dividends from Canadian corporations receive the federal dividend tax credit. In 2026 Ontario, at the $57,375–$114,750 federal bracket, the effective marginal rate on eligible dividends is meaningfully lower than the rate on employment income. Yield on cost growth is real — but the after-tax yield on cost is what matters for planning.

The practical implication: a Canadian dividend grower expected to compound its dividend at 5–7% per year has its strongest long-term return in a TFSA. Highest-yield-on-cost-trajectory holdings belong there first.

When Yield on Cost Becomes a Trap

Yield on cost is a lens, not a hold signal. Two situations where it misleads:

1. Dividend cuts reset the math. A position with 12.00% yield on cost is worth nothing if the dividend is cut 60%. Yield on cost tracks income history. It does not forecast dividend safety. Always evaluate payout ratio, cash flow coverage, and sector conditions separately.

2. Capital tied to low-growth compounders. If a holding has stalled at 2% annual dividend growth and a more efficient position would compound at 7%, the opportunity cost of holding for legacy yield on cost can exceed the advantage. Use the Time to Freedom Calculator to model what different income growth rates mean for when your portfolio crosses your income target.

The strategic version of yield on cost does not obsess over a single number. It asks: is this position still compounding toward my income target faster than the alternative?

Using the Dividend Calculator to Run Your Numbers

To calculate yield on cost on any holding, you need two inputs: current annual dividend per share and your adjusted cost base per share. The Dividend Calculator lets you input your cost basis, current dividend, and projected growth rate to model how yield on cost compounds over time.

Run your top three holdings through it. If any position shows a yield on cost trajectory materially outpacing what a new entry would deliver, that is a number that should be part of any replacement decision — alongside the tax cost of the switch and the fundamentals of the alternative.

Takeaway

Yield on cost rewards Canadian investors who buy dividend growers early, hold through price appreciation, and reinvest dividends while the share count compounds. After a decade, the gap between yield on cost and current yield is real, tax-relevant, and often larger than it looks.

Three things to track: your ACB per share, annual income growth rate, and which account holds each position. TFSA allocation for the highest-trajectory dividend growers maximizes what yield on cost actually delivers after tax. A 10-year holding generating 8.00% yield on cost in a TFSA is a structurally different asset than its current yield suggests — and replacing it costs more than a screener comparison shows.