By Julia Santos · Founding Editor, DividendsTimes
Educational analysis, not personalized investment advice.
Two stocks. One yields 6% today and has not raised its dividend in years. The other yields 2% today but has raised its payout by double digits annually for a decade. Ask most new investors which one pays more, and they will point at the 6%. Run the math forward, and the answer can flip entirely.
In this article
The concept that explains the flip: yield on cost
Yield on cost measures your current dividend income against your original purchase price, rather than the stock’s current price. It only rises when a company raises its dividend, and it rises faster the more aggressively that dividend grows.
Running the actual numbers
A stock bought at a 2% yield that grows its dividend by 10% annually reaches roughly double its starting yield on cost in about seven to eight years, purely from compounding dividend increases. A stock yielding 6% with a 0% growth rate, by contrast, pays exactly 6% on your original cost forever, no more.
Where the crossover point actually lands
The exact number of years before the growing, lower-starting-yield stock overtakes the flat, higher-starting-yield one depends on the specific growth rate and starting gap, but a 2% yield growing at 10% annually typically overtakes a flat 6% yield somewhere in the range of a decade, sometimes sooner.
Why this does not mean ignore yield entirely
A near-zero starting yield needs an extremely long runway and an extremely high growth rate to ever catch up to a moderate, stable yield, which is why the math favors a reasonable starting yield paired with real growth over either extreme alone.
What this means for building a portfolio
- A stock’s current yield tells you what you get paid today.
- Its dividend growth rate tells you what you will be paid years from now, on the same original investment.
- Neither number alone tells the full story, and the length of your holding period determines which one matters more.
Frequently asked questions
What is yield on cost?
It is your current dividend income divided by your original purchase price, rather than the stock’s current market price, and it rises whenever the company raises its dividend.
Is a high current yield always worse than a growing low yield?
Not always. It depends on your holding period and the reliability of the growth rate.
How long does it typically take a growing dividend to overtake a flat, higher one?
It varies by the specific growth rate and starting gap, but a meaningfully growing dividend can overtake a flat, higher-yielding one within roughly a decade in many realistic scenarios.
Educational analysis, not personalized investment advice.