There’s a famous anecdote about Warren Buffett and Coca-Cola that perfectly captures the magic of long-term investing.
Berkshire Hathaway began buying Coca-Cola (KO) stock in the late 1980s, investing roughly $1.3 billion between 1988 and 1994. Berkshire’s holdings grew to 100 million shares before a pair of 2-for-1 splits (in 1996 and 2012) pushed the total to 400 million shares, which are currently worth $31.4 billion.
But what’s notable isn’t the impressive returns, it’s this:
Those 400 million shares have distributed $824 million in dividends in the last 12 months alone, giving Berkshire a yield on cost of 63.4%.
That means Berkshire earns in dividends what it paid for the entire original position about every year and a half.
And all it took to achieve that was two things: a good company plus time.
What Is Yield on Cost?
Yield on cost (YOC) measures the annual dividend income you receive relative to the price you originally paid for a stock and not its current market price.
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The calculation is straightforward:
The Formula
Yield on cost = (Current Dividend / Original Purchase Price) x 100
Simple Example
- You buy a stock at $50 per share
- It pays a $2 annual dividend
- Your initial yield: 4%
Now fast forward 10–15 years:
- Dividend grows to $6 per share
- Your yield on cost is now:
- ($6 / $50) x 100 = 12%
Even if the stock is trading at $150 today, your personal yield is based on your cost basis – not the current price.
Why Yield on Cost Matters
Yield on cost flips the way most people think about income investing.
Instead of chasing high yields today, it rewards:
- Patience
- Dividend growth
- High-quality businesses
A stock that starts with a modest 2–3% yield can become a high-single-digit or double-digit income generator over time if its dividend grows consistently.
The Key Ingredient: Dividend Growth
Yield on cost only improves if the company raises its dividend regularly.
That’s why long-term income investors prioritize:
- Strong earnings growth
- Durable competitive advantages
- Consistent dividend increases
This is the secret weapon that turned Buffett’s Coca-Cola investment into an income powerhouse.
Yield on Cost, in 3 Parts
The thing about yield on cost is that long-term investors don’t have to limit themselves to conservative dividend payers.
The “good company plus time” math I mentioned above can even turn high-flying growth stocks into legitimate income sources.
Let’s run through a few examples.
Apple (AAPL)
Apple isn’t exactly a Dividend Aristocrat.
In fact, from 1995 until 2012, it didn’t even pay a dividend at all.
But in August of 2012, the company resumed paying a dividend. The initial dividend was $2.65 per share (quarterly), which would have translated to an annual yield of 1.7% (the stock closed on the ex-dividend date at 621.60; split-adjusted 22.20).
In the last 12 months, Apple has paid $1.05 in dividends, giving you a yield on cost of 4.7%.
That’s not the kind of yield that will have you falling out of your chair, but it’s an incredible yield on one of the fastest-growing tech stocks in the market.
And, of course, shares have more than 10x’ed in that time.
Coca-Cola (KO)
We’ve already covered Berkshire’s yield on cost math for Coca-Cola, but what would it look like for an investor who didn’t build a billion-dollar position back in the 1980s?
Using the same starting date as our Apple example above, if we bought KO on August 10, 2012, we’d have paid 39.40 for shares, and in the previous 12 months, Coke had paid $1.095 in dividends, giving us an initial yield of 2.78%.
In the most recent one-year period, KO has distributed $2.06 in dividends, giving us a yield on cost of 5.23%.
Shares of this steady dividend payer have doubled in the intervening years, and your income has nearly doubled as well.
Home Depot (HD)
Our final example is Home Depot, the massive home-improvement retailer.
On August 10, 2012, shares closed at 53.06, and the company was paying $1.16 each year, for an initial yield of 2.19%.
In the most recent one-year period, HD has distributed $9.23 in dividends, giving us a yield on cost of 17.4%.
As a bonus, shares are up 500% over the same time period.
Good Companies Plus Time
None of these companies reinvented the wheel. They’re just good companies with competitive advantages that have grown steadily over time.
They also weren’t particularly hard companies to identify.
Really, the hardest thing to do for investors was just to stay patient.
As a final note, if you split $10,000 evenly between the three companies at our starting point and reinvested dividends, your portfolio would be worth $88,058 and would distribute $1,293.83 in dividends each year.
That dividend reinvestment helps turbocharge your yield and lifts your total yield on cost for the full portfolio to 12.9%.
It may not be Buffett’s 63%, but it helps make for one heck of a portfolio.
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