Yield is a financial term used to describe the income generated and realized on an investment over a particular period of time, expressed as a percentage. It is a measure of cash flow that an investor gets on the amount invested in a security. Yield is mostly computed on an annual basis, though other variations like quarterly and monthly yields are also used. Yield should not be confused with total return, which is a more comprehensive measure of return on investment. Yield is calculated as the net realized return divided by the principal amount.
Yield is a measure applied to fixed income securities, common stocks, preferred stocks, convertible stocks and bonds, annuities, and real estate investments. There are various types of yield, and the method of calculation depends on the particular type of yield and the type of security. Some common types of yield include:
-
Yield to Maturity: This is an estimate of the total rate of return anticipated to be earned by an investor who buys a bond at a given market price, holds it to maturity, and receives all interest payments and the payment of par value on schedule. Unlike current yield, it takes into account the payment of principal to the bondholder when the bond matures.
-
Current Yield: This is the annual income (interest or dividends) divided by the current price of the security. It is a measure of the income generated by the security in the current year.
-
Cost Yield: This is the yield of a bond based on its purchase price rather than its face value. It is calculated by dividing the annual interest payment by the purchase price of the bond.
-
Dividend Yield: This is the annual dividend payment divided by the current stock price. It is a measure of the income generated by the stock in the current year.
Yield is often expressed as a percentage, based on either the investment’s market value or purchase price.
