What Is Yield? (With Common Types and Example Calculations)

Updated May 25, 2023

Yield is an important metric in finance because it measures the return on an investment over a period. It tells you how much income an investor or company earns every year relative to the initial cost or market value of its investment. If you're in a finance or management role, calculating yield can help you make better financial decisions and evaluate whether investing in a company is a good idea.

In this article, we define what yield is, discuss why it's important, list its different types and provide several examples of calculating yield.

What is yield?

Yield refers to how much money investors earn on security over a designated period. Companies often express it as a percentage of the security's market value or the initial investment. Yield accounts for the interest you earn and dividends you receive from a specific stock or bond. While you can calculate yield using any period, like monthly or quarterly, it's most common to use annual yields. In general, riskier investments have a higher yield potential than those with less risk. For instance, stocks usually have a higher yield potential than bonds.

If you want to become an investor, knowing how to monitor the yield of an investment can help you analyze how a company's or investor's securities are performing. Yield can indicate positive or negative changes in the cash an investor earns from securities. For example, a higher yield value usually means an investment is at lower risk and earning a higher income. When yields grow too high, it can reveal a decreasing stock price or a company that's paying higher dividends, which could be a warning sign. Lower yields also can indicate low earnings and higher risk.

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A man sits at a laptop talking on a cell phone, next to a list with the title "How To Calculate Yield" and these steps:
• Determine the initial investment
• Establish the income
• Divide income by market value
• Convert to a percentage

How to calculate yield

You can follow these steps to calculate yield:

Determine the market value or initial investment of the stock or bond.
Determine the income generated from the investment.
Divide the market value by the income.
Multiply this amount by 100.

Depending on the type of investment, you can use the following formulas for yield:

Stock yield = (dividends per share / stock price) x 100

Bond yield = (coupon / bond price) x 100

Real estate yield = (net rental income / real estate value) x 100

Yield vs. return

Yield and return are both measurements you can use to express earnings from an investment, but they have distinct features that differentiate them. Companies or investors use yield to estimate future net earnings, and they also express it as a percentage of an investment's value. Conversely, return is the amount an investor gains or loses from an investment over a period, and they often express it as a dollar amount. Return involves earnings that already have occurred. Yield doesn't incorporate capital gains, while return factors in capital gains, interest and dividends.

Types of yields

There are several types of yields, including:

Yields on stocks: In stocks, the income a stockholder gets at an individual level is their dividends. To calculate yields on stocks, you can divide the value of dividends paid per share in a year by the value of one share of stock.
Yields on bonds: Bond income takes the form of coupons, which investors receive payment for semiannually or annually. You can calculate a bond's yield by dividing its coupon payment by the bond's face value.
Yields on mutual funds: Mutual fund yields include income from dividends and interest received over a period. You can calculate yields on the mutual fund by dividing the annual dividend by its share price.
Yields on real estate: Real estate yield factors in net rental income after expenses to determine how much an investor makes in relation to the property's value. You can calculate a real estate yield by dividing the annual rent by the property's value.

Examples of calculating yield

Here are several examples of calculating yield to help you understand this concept better:

Stock yield

Here's an example of calculating stock yield:

Dion's considering investing in a stock, so he wants to determine his annual yield from it. The stock has a share price of $175.50 and pays an annual dividend of $7.20 per share. To find his stock yield, he divides this by its share price and multiplies it by 100 using this equation:

Stock yield = (dividends per share / stock price) x 100

Stock yield = ($7.20 / $175.50) x 100

Stock yield = 0.041 x 100

Stock yield = 4.1%

Bond yield

Here's an example of calculating bond yield:

Julie's looking for ways to make extra money for her daughter's college fund. She decides to purchase bonds that have a coupon rate of 4.5% for the price of $98.25 per bond. To determine the bond's yield, Julie determines first the coupon amount from its percentage, which she calculates to be $4.50 per bond per year. Julie then divides it by the bond's price and multiplies the result by 100. Here's the equation she used to find her bond yield is 4.58%:

Bond yield = (coupon / bond price) x 100

Bond yield = ($4.50 / $98.25) x 100

Bond yield = 0.0458 x 100

Bond yield = 4.58% per bond

Real estate yield

Here's an example of real estate yield:

Jamie wants to buy a home that he can rent out to earn extra money. He finds a home to purchase for $350,000. After researching the market, he decides to rent it out for $2,200 per month. His monthly fees to maintain the property are $1,050. To calculate his real estate yield, he first determines the annual rental income is $26,400 and the annual expenses are $12,600. Next, he subtracts the expenses from the income to calculate net rental income, which is $13,800 per year.

To get the real estate yield, Jamie divides the annual rental income by the net rental income and multiplies the result by 100. Here's the equation:

Real estate yield = (net rental income / real estate value) x 100

Real estate yield = ($13,800 / $350,000) x 100

Real estate yield = 0.0394 x 100

Real estate yield = 3.94%

Mutual funds yield

Here's an example of calculating mutual funds yield:

Alex invests in a mutual fund that has a current market price of $30 per share and paid $0.04 in monthly dividends over the past year. To calculate the fund's yield, Alex multiples the monthly dividend by 12 to get the annual dividend, which is $0.48. Alex divides the annual dividends paid by the share price and then multiplies the result by 100.

Mutual fund yield = (Annual dividend / share price) x 100

Mutual fund yield = ($0.48 / $30) x 100

Mutual fund yield =1.6%

This article is for informational purposes only and does not constitute financial advice. Consult with a licensed financial professional for any issues you may be experiencing.