Yield

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Yield in Finance: Formula, Types, and What It Tells You

Definition

Yield is the cash income an investor receives from an asset, expressed as a percentage of the investment. It typically includes interest payments or dividends and is usually reported on an annual basis. Yield is a measure of income, not the same as total return, which also includes capital gains or losses.

Basic formula

Net yield = Net realized return ÷ Principal amount

Examples:
* If a stock is bought at $100, rises to $120, and pays a $2 dividend, total yield = ($20 + $2) ÷ $100 = 22%.
* A 5% yield means $5 of income for every $100 invested.

What yield indicates — and its limits

  • Higher yield means more cash flow, but it doesn’t automatically mean a better investment.
  • For stocks: a rising dividend yield can reflect increased payouts or a falling stock price (yield = dividend ÷ price), so interpret carefully.
  • For bonds: higher yields often compensate for higher credit or interest-rate risk.
  • Yield alone ignores price appreciation/depreciation and fees, so use it alongside measures like total return and credit quality.

Types of yield

Stocks

  • Yield on Cost (YOC) — dividends ÷ purchase price
    Example: $2 dividend on a $100 buy = 2% YOC.
  • Current Yield — dividends ÷ current market price
    Example: $2 dividend on a $120 market price = 1.67% current yield.
    Note: Current yield falls when share price rises, all else equal.

Bonds

  • Nominal (coupon) yield — annual interest ÷ face value
    Example: $50 annual interest on $1,000 par = 5% nominal yield.
  • Yield to Maturity (YTM) — average annual return if the bond is held to maturity, taking into account coupon payments, price paid, and any gain/loss at maturity.
  • Yield to Call (YTC) — yield if a callable bond is redeemed by the issuer at the call date.
  • Yield to Worst (YTW) — the lowest yield possible without issuer default, accounting for calls, prepayments, or sinking funds.
  • Floating-rate and index-linked bonds — yields change over time as reference rates or indices (e.g., CPI) fluctuate.

Municipal bonds

  • Tax-Equivalent Yield (TEY) — converts a tax-free municipal yield into an equivalent taxable yield:
    TEY = Tax-free yield ÷ (1 − marginal tax rate)

Mutual funds and ETFs

  • Mutual fund yield — net income distribution (dividends + interest) ÷ fund share value; varies with net asset value.
  • SEC Yield — a standardized yield measure for funds that accounts for fund fees and provides a consistent basis for comparison.

How investors use yield

  • Income-focused investors use yield to estimate cash flow from holdings.
  • Compare yields across similar securities to gauge relative income and implied risk.
  • Combine yield with credit ratings, duration (for bonds), growth prospects, and total-return expectations when making decisions.

Key takeaways

  • Yield measures income returned to investors, usually as an annual percentage.
  • It differs from total return, which includes price changes.
  • High yield can signal attractive income or elevated risk—context matters.
  • Use standardized measures (YTM, SEC yield, TEY) to compare securities reliably.

Short FAQs

Q: Is yield the same as profit?
A: Yield measures income (interest/dividends) relative to investment; profit may include capital gains or losses, which yield does not capture.

Q: What does a 5% yield mean?
A: It means $5 of income per $100 invested over a year (ignoring fees, taxes, and price changes).

Q: Is dividend yield the same as total return?
A: No. Dividend yield covers only dividends; total return includes dividends plus any change in market price.