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Yield

Income-only return on investment expressed as an annual percentage

What is Yield (Definition)?

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. 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 500, for example, typically ranges between 2.0 – 4.0%.

 

Yield formula and diagram

 

Percent Yield Formula

The percent yield formula is a way of calculating the annual income-only return on an 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 Rate“)

 

Dividend Yield (Stocks)

When it comes to stocks, the income stockholders 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 investors, the income they receive is in the form of coupon 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 estate 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 Rate 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 designation, created to turn anyone into a world-class financial analyst.

To continue advancing your career these resources will be useful:

  • What is Financial Modeling
  • Financial Analyst Salary Guide
  • Fixed Income Bond Terms
  • Investing: A Beginner’s Guide

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