Dividend yield is one of the most commonly utilized financial ratios for income investors. It is also one of the easiest to calculate. The current dividend yield is simply the annual dividend payment of a stock divided by the share price. It tells an investor the amount of dividend income they will receive from buying a stock, expressed as a percentage.

For example, PepsiCo (PEP) has a current dividend yield of 3.4%. But income investors should also familiarize themselves with yield on cost, which is different than the current dividend yield. While the current dividend yield is simply the company’s dividend per share divided by the current share price, yield on cost is the current dividend per share divided by the investor’s cost basis.

Yield on cost basically shows the yield of the stock from a historical basis, considering the original price paid and not the current price. It also proves the benefits of investing in high-quality dividend growth stocks like PepsiCo.

Why Yield On Cost Is Important

The current yield is a very simple equation. In PepsiCo’s case, the company currently pays an annualized dividend of $3.71 per share. With a recent share price of $108, investors buying the stock today will earn a dividend yield of 3.4%. The current dividend yield could change going forward, if the share price fluctuates, or if the company adjusts its dividend payment higher or lower. Dividend stocks are attractive for income investors, as they provide dividend income, which is especially valuable in a low interest rate environment.

Put simply, dividend stocks are good—but dividend growth stocks are even better. Companies that reward shareholders with a dividend demonstrate that they prioritize the interests of their investors. At the same time, companies that can raise their dividends on a regular basis prove that they have strong business models with durable competitive advantages. There is perhaps no stronger sign of a high-quality business than consistent dividend increases each year.