Yield definition

Yield is the income earned on an investment over a certain period, usually annually. It is expressed as a percentage based on the initial invested amount of an asset. Yield often comes in the form of interest earned or dividends received from holding a particular asset. Depending on the qualities of the asset, the yield can either be classified as known or anticipated.

Monitoring the yield of an investment can help investors analyse how certain assets are doing. Investments with higher yield values are often thought of as having higher income and lower risk. On the flip side, investments that have lower yields can indicate low earnings and high risk.

Types of yields

Yields can vary based on factors such as the duration of the investment, the return amount, and the invested asset. Below are a few popular types of yields:

Stock yield: For stocks, two types of yields are generally used. When calculated based on the purchase price, it is called Yield on Cost (YO). When calculated based on the current market price, it is referred to as the current yield. This measures the growth of an investment and is popular among value investors.

Bond yield: This is the annual rate of return of a bond. This can be calculated in various ways but is commonly given as a percentage of the bondholder’s initial capital.

Dividend yield: This is a financial ratio that highlights how much a company pays out in dividends each year, relative to its stock price. It shows the return an investor would earn from an investment based solely on dividend payments.

Yield vs Return

Though both yield and return measure the profitability of an investment over a set period, they are different from each other. Yield specifically refers to the income the investment returns over time, while return is the amount that was lost or gained on an investment. Return is also expressed as a dollar value, rather than a percentage like yield.

Yield is forward-looking, as investors and companies typically use it to estimate future net earnings. On the other hand, return is backward-looking or retrospective, as it involves looking at earnings that have already happened.

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