Yield

What Is a Yield?

A yield is the income an investment generates over a year, shown as a percentage of the investment's price. It tells an investor how much cash flow an asset returns relative to what it costs, which makes it a quick way to compare income-producing investments. Yield measures income only. It does not include changes in the asset's price, which is what total return captures.

Yield is most often used for stocks, bonds, and other assets that pay regular income. The exact calculation depends on the type of asset.

How Yield Is Calculated

For a stock, the most common measure is the dividend yield:

Dividend yield = Annual dividends per share ÷ Current share price

For a bond, the simplest measure is the current yield:

Current yield = Annual coupon payment ÷ Current bond price

Because the current price is the denominator, yield moves in the opposite direction of price. If a stock's price rises while its dividend stays the same, its dividend yield falls. If a bond's price drops, its yield rises. Bond investors also look at yield to maturity, which estimates the total annual return if the bond is held until it matures and all payments arrive as scheduled.

Example

Suppose a stock trades at 50 dollars and pays 2 dollars per share in dividends over the year. Its dividend yield is 2 divided by 50, or 4 percent. If the price rose to 60 dollars while the dividend stayed at 2 dollars, the yield would fall to about 3.3 percent, even though the company paid the same amount. These figures are hypothetical.

Limits and Why It Matters

Yield is useful but incomplete. A high yield can sometimes signal that the market expects trouble, since a falling price pushes yield up. Yield also ignores price gains or losses and, for many investments, the effects of taxes and fees. Investors often examine yield alongside the payout ratio or a credit rating to judge whether the income is likely to continue.