Yield
Yield is the income generated by an investment as a percentage of its cost or current value. For bonds, it is the interest payment divided by price. For stocks, it is the annual dividend divided by share price. Higher yield often signals higher risk.
A stock paying $2/year in dividends at a $50 share price has a 4% dividend yield.
There are several types of yield. Current yield = annual income ÷ current price. Yield to maturity (YTM) accounts for bond price discount/premium and gives the total return if held to maturity. Dividend yield = annual dividends per share ÷ price per share.
Bond yields and prices move inversely: when interest rates rise, existing bond prices fall (their fixed coupon is now less attractive), pushing yields up. This is why bond funds lose value when the Fed raises rates.
A high dividend yield can signal either a generous company or a company in distress (the stock price has fallen, inflating the yield ratio). Always investigate why a yield is high before buying.
Related terms
- Bond
- A bond is a fixed-income debt security in which an investor loans money to a government or corporation for a defined period at a fixed interest rate. Bonds are generally less volatile than stocks but provide lower long-term returns.
- Dividend
- A dividend is a cash payment made by a company to its shareholders, typically quarterly, as a distribution of profits. Dividends provide income without selling shares and are common among mature, profitable companies.
- Rate of Return
- A rate of return (RoR) is the net gain or loss of an investment over a specified period, expressed as a percentage of the initial investment.