Yield is defined as an income-only return on investment (it excludes capital gains) calculated by taking dividends, coupons, or net income and dividing them by the value of the investment, expressed as an annual percentage. Yield tells investors how much income they will earn each year relative to the market value or initial cost of their investment. The average yield of stocks on the S&P 500, for example, typically ranges between 2.0 – 4.0%.
Percent Yield Formula
The percent yield formula is a way of calculating the annual income-only return on an investment by placing income in the numerator and cost (or market value) in the denominator.
Percentage yield formula:
= Dividends per Share / Stock Price x 100
= Coupon / Bond Price x 100
= Net Rental Income / Real Estate Value x 100 (also called “Cap Rate“)
Dividend Yield (Stocks)
When it comes to stocks, the income stockholders receive at an individual level is in the form of dividends. Dividend frequency varies but is typically quarterly (sometimes monthly, semi-annually, or annually).
Let’s look at an example of the percent yield formula in action for a dividend-paying stock. We can easily calculate it by working through an everyday example.
Sam is focused on capital growth but also wants to receive some income from his stocks. As a result, he decides to invest in shares of Goldman Sachs (NYSE:GS), which has a current share price of $231.69 and a quarterly dividend of $0.80 per share. What is the current dividend yield?
For bond investors, the income they receive is in the form of coupon payments, which can vary in frequency but are typically semi-annual.
Sara is planning for retirement and wants to focus on earning some fixed income payments to fund her lifestyle. She plans to purchase some First Data corporate bonds that have a coupon of 5.75% and can be purchased at a price of $105.21. What is the bond’s yield?
Another common example is in real estate when investors wish to know how much of a percentage return they will earn in rental income they will receive from a property, after taking into account all operating expenses. The is referred to as the Capitalization Rate in real estate.
Linda is interested in buying an apartment and renting it out to earn some extra income. She can buy a two bedroom apartment unit for $875,000 and it will rent out for $2,700 per month. She will have total monthly costs (taxes, strata fees, etc.) of $975. What is the yield on her real estate investment?