Yield is the income or cash flow you receive from your investments over time. It’s typically expressed as a percentage of the face value, current market value or invested dollar amount.
Investment yield measures the cash flow that you know or anticipate you’ll receive on investments like stocks and bonds, mutual funds and rental properties. It’s usually calculated on an annual basis, but you can calculate yield over any period.
Additionally, you can calculate several types of yield, such as:
Additionally, an investment’s yield depends on price movements, dividend payouts, and whether you earn fixed or variable interest (on bonds).
For example, when you calculate a stock’s yield, you might look at both appreciation and dividends. Say that you own one share of stock worth $100 that pays a $5 dividend and gains $50 in price. To calculate your yield, you’d divide the value of your earnings by the original price, like so:
($50 + $5) / $100 = 0.55, or 55% yield
Note that yield isn’t the same as return, which is a dollar amount that you gain or lose from your investment. Additionally, most yields don’t consider capital gains, or profits from selling your securities. That said, as you can see above, many do consider price appreciations, or the rise in value of a security before you sell.
At first glance, yield tells you the value of an investment based on the income it generates. This is particularly important for income investors, who may supplement part or all their income from their investments. Additionally, monitoring yield can highlight both positive and negative performance in your portfolio.
But knowing an investment’s yield doesn’t just tell you your profit—it can also provide some information about the investment itself. For instance, higher yields typically generate more income and indicate less risk, while lower yields suggest the opposite.
That said, higher yields aren’t always better, which is why you should pay attention to the mechanism behind an investment’s yield. For example, some companies set “traps” by offering high dividends to lure investors toward low-performing stocks. And if a security’s yield rises suddenly, it could indicate that the security price has dropped, artificially inflating the yield.
Calculating an investment’s yield can tell you how much return you’ve earned (or how much you estimate you’ll earn in the future). Yield can also help you evaluate whether you should invest in a particular security or even indicate its level of risk.
But you shouldn’t take yield at face value. It's also important to consider fundamentals and overall performance before you make (or drop) an investment.
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