What is Yield (Definition)?
Yield is defined as an income-only return on investment (it excludes capital gainsCapital Gains YieldCapital gains yield (CGY) is the price appreciation on an investment or a security expressed as a percentage. Because the calculation of Capital Gain Yield involves the market price of a security over time, it can be used to analyze the fluctuation in the market price of a security. See calculation and example) calculated by taking dividendsDividendA dividend is the share of profits a shareholder receives, made on behalf of the corporation. When a company genearates a profit and accumulates retained earnings, those earnings can be either reinvested in the business or paid out to shareholders as a dividend. Types include: cash, common, preferred, stock, property, coupons, or net incomeNet IncomeNet Income is a key line item, not only in the income statement, but in all three core financial statements. While it is arrived at through the income statement, the net profit is also used in both the balance sheet and the cash flow statement. and dividing them by the value of the investment, expressed as an annual percentage. The 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 500S&P - Standard and Poor'sStandard and Poor's (S&P) is a market leader in the provision of benchmarks and investible indices, as well as credit ratings for companies and countries, and other financial information services., 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 investmentReturn on Investment (ROI)Return on Investment (ROI) is a performance measure used to evaluate the returns of an investment or to compare efficiency between different investments. ROI measures the return of an investment relative to the cost of the investment. by placing income on the numerator and cost (or market value) on the denominator.
The percentage yield formula can be:
= Dividends per Share / Stock Price x 100
= Coupon / Bond Price x 100
= Net Rental Income / Real Estate Value x 100 (also called “Cap RateCapitalization RateThe capitalization rate (Cap Rate) is used in real estate, refers to the rate of return on a property based on the net operating income of the property“)
Dividend Yield (Stocks)
When it comes to stocks, the income stockholdersStakeholder vs ShareholderThe terms “stakeholder” and “shareholder” are often used interchangeably in the business environment. Looking closely at the meanings of stakeholder vs shareholder, there are key differences in usage. Generally, a shareholder is a stakeholder of the company while a stakeholder is not necessarily a shareholder. A receive at an individual level is in the form of a dividend. Dividend frequencies can vary, but are typically quarterly (and sometimes monthly, semi-annual or annual).
Let’s look at an example of the percent yield formula in action for a divided paying stock. We can easily calculate it by working through some everyday examples in our investing lives.
Example:
Sam is focused on capital growth but also wants to receive some income on 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?
Answer:
$0.80 x 4 = $3.20 annual dividend
$3.20 / $231.69 = 0.00138
0.00138 x 100 = 1.38%
Learn more in CFI’s Free Corporate Finance Course.
Interest Yield (Bonds)
For bond investorsBondsBonds are fixed-income securities that are issued by corporations and governments to raise capital. The issuer borrows capital from the bondholder and makes fixed payments to them at a fixed (or variable) interest rate for a specified period. What is an Indenture? An indenture is a binding contract between an issuer, the income they receive is in the form of couponCoupon RateA coupon rate is the amount of annual interest income paid to a bondholder based on the face value of the bond. Government and non-government entities issue bonds to raise money to finance their operations. When a person buys a bond, the bond issuer promises to make periodic payments to the bondholder payments, which can vary in frequency but are typically semi-annual.
Example:
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?
Answer:
5.75% x 100 = $5.75 per bond per year
$5.75 / 105.21 = 0.0547
0.0547 x 100 = 5.46%
Learn more in CFI’s Fixed Income & Bonds Course.
Rental Income Yield (Real Estate)
Another common example is in real estateReal EstateReal estate is real property that consists of land and improvements, which include buildings, fixtures, roads, structures, and utility systems. Property rights give a title of ownership to the land, improvements, and natural resources, such as minerals, plants, animals, water, etc. when investors wish to know how much rental income they will receive from a property, after taking into account all of the expenses of operating it. The is referred to as the Capitalization RateCapitalization RateThe capitalization rate (Cap Rate) is used in real estate, refers to the rate of return on a property based on the net operating income of the property in real estate.
Example:
Linda is interested in buying an apartment and renting it out to earn some extra income have have more money to spend on day-to-day lifestyle. 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?
Answer:
$2,700 – $975 = $1,725 net monthly income
$1,725 x 12 = $20,700 net annual income
$20,700 / $875,000 = 0.0237
0.0237 x 100 = 2.37%
Learn more in CFI’s Real Estate Modeling Course.
Additional Resources
Thank you for reading this guide to understanding income-only returns in finance and investing. CFI is the global provider of the FMVA™ analyst designationFMVA™ CertificationThe Financial Modeling & Valueation Analyst (FMVA)™ accreditation is a global standard for financial analysts that covers finance, accounting, financial modeling, valuation, budgeting, forecasting, presentations, and strategy. 
, created to turn anyone into a world-class financial analyst.
To continue advancing your career these resources will be useful:
- What is Financial ModelingWhat is Financial ModelingFinancial modeling is performed in Excel to forecast a company's financial performance. Overview of what is financial modeling, how & why to build a model. A 3 statement model links income statement, balance sheet, and cash flow statement. More advanced types of financial models are built for valuation, plannnig, and
- Financial Analyst Salary GuideFinancial Analyst Salary GuideIn this financial analyst salary guide, we cover several financial analyst jobs and their corresponding midpoint salaries for 2018. Financial analysts are responsible for examining financial data and their findings are used to help businesses come up with decisions, mainly for investing.
- Fixed Income Bond TermsFixed Income Bond TermsDefinitions for the most common bond and fixed income terms. Annuity, perpetuity, coupon rate, covariance, current yield, par value, yield to maturity. etc. The Corporate Finance Institute offers a complete education in finance and financial analysis.
- Investing: A Beginner’s GuideInvesting: A Beginner's GuideCFI's Investing for Beginners guide will teach you the basics of investing and how to get started. Learn about different strategies and techniques for trading, and about the different financial markets that you can invest in.
