What is Yield?
Yield is used to describe the annual return on your investments as a percentage of your original investment, usually from either:
- Dividend payments from a stock, ETF, or mutual fund
- Interest payments from a bond
For Stocks, ETFs, and Mutual Funds:
Below is an example from Intel’s stock data, as you would see it on many of the financial sites today:
Some websites may calculate the percent yield based on the dividends paid over the last twelve months (TTM – Trailing Twelve Months). Here, we are looking at TradeKing, which calculates this by assuming the most recent quarterly dividend ($0.26 per share) continues for the next year. $0.26 x 4 = $1.04
How to Calculate a Stock’s, ETF’s, or Mutual Fund’s Yield
The equation to calculate the annual dividend yield of a stock is:
Plugging in Intel’s dividend and stock price to determine Intel’s yield:
(TradeKing is showing 3.07% because the most recent share price is not used in the calculation. TradeKing is using $33.87 for the stock price, which is where Intel’s shares were a day ago)
What does this 3.07% yield mean? Every year you are invested in Intel stock, you will receive 3.07% of your initial investment in the form of dividends paid back to your account. For each $1,000 initially invested you will receive about $30.70 per year if dividends continue to be paid as they are now.
Notice that if Intel’s stock price rises, its yield will drop. Investors will still receive the same $1.04 per share dividend, but the dividend will be a smaller percentage of their original investment.
For example, lets say an investor purchases Intel stock at $40 a share. This investor’s yield would be:
Or a 2.6% dividend yield.
This is why it is commonly said that yield and price have an inverse relationship.
A higher purchase price will lead to a reduced yield on your investment. Lower prices lead to yield increases.
Yield For Bonds
Yield from interest payments on bonds work much the same way. When invested in a bond, you receive interest payments at scheduled intervals (quarterly, semi-annually or annually usually). Bond yields represent the percentage of your original investment the annual interest payments, or sometimes called coupon payments, are.
Consider the bond below from Macy’s:
We won’t get into all the detail of this here, for now look at the two highlighted areas. In the top right we see the terms “Coupon” and “Maturity”.
-Coupon represents the Yield of the bond at par value, or the original price the bond was initially offered at, which is usually 100.
-Maturity represents the day the bond will be paid back. This describes the period of time an investor will be able to own the bond before it is redeemed.
So an investor who purchased $10,000 of these bonds at their issue will receive a current yield of 4.375% (the coupon rate) a year until the year 2023 on this individual investment.
Now look in the lower left at “Price” and “Current Yield”. Remember that the bond’s par value was 100, now the bond price has increased to 104.93.
Just like how investors paying $40 a share for Intel above received a lower yield because of the higher share price, investors in this bond receive less than the 4.375% coupon because the price of the bond has increased. In fact, they would receive 4.169%. Investors buying at the current price of 104.930 here receive the same interest payment as the initial investor who bought at 100, but that interest payment is a smaller percentage of their investment because the investor paid a higher price for the bond (104.93 vs. 100).
This is an important basic lesson in investing:
As prices increase, yields decrease. As prices decline, yields increase.
Calculating a bond’s Yield to Maturity factors in the purchase price of a bond, the coupon, and the redemption value to provide you an estimated total annualized return on a bond if you hold until maturity.
Thinking of investing in high yielding stocks? Check out our article on how to determine if your company’s dividend is sustainable.
Interpretation of Financial Statements, Defines this as:
“The return on an investment, expressed as a percentage of cost. Straight yield or current to yield is found by dividing the market price into the dividend rate in dollars (for stocks) or interest rate (for bonds). It ignores the factor of maturity or possible call at a higher price or lower than the market.
The Dividend Yield is a percentage figure, found by dividing the dividend rate in dollars by the market price in dollars.”