Glossary term
Yield
Yield is the income an investment produces relative to its price or value, usually expressed as a percentage.
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What Is Yield?
Yield is the income an investment produces relative to its price or value, usually expressed as a percentage. Depending on the investment, yield may refer to interest, dividends, distributions, bond income, or a more specific calculation such as current yield or yield to maturity.
The word sounds simple, but yield can mean different things in different contexts. That is why investors should always ask which yield measure is being quoted.
Key Takeaways
- Yield measures investment income relative to price or value.
- Different investments use different yield calculations.
- A higher yield can reflect higher income, a lower price, higher risk, or some combination of all three.
- Bond yield and dividend yield are not the same thing.
- Investors should compare yield with credit risk, duration, liquidity, taxes, fees, and total return.
How Yield Works
At its simplest, yield compares income with an investment's price. If an investment pays income and its price falls, the quoted yield may rise. If the price rises, the quoted yield may fall, assuming the income amount stays the same.
That relationship is especially important for bonds. Bond prices and yields generally move in opposite directions, but the exact yield quoted depends on the calculation being used.
Common Yield Measures
Yield type | What it focuses on |
|---|---|
Dividend yield | Annual dividends relative to stock price |
Current yield | Annual bond income relative to current price |
Yield to maturity | Estimated annualized return if a bond is held to maturity, assuming payments occur as expected |
SEC yield | Standardized yield measure often used for bond funds |
Why High Yield Deserves a Second Look
A high yield can be attractive, but it can also be a warning sign. The market may be demanding more income because the investment has higher credit risk, falling price, uncertain payout, poor liquidity, or a weaker outlook.
Yield is most useful when paired with the source of the income and the risk supporting it. A yield that looks generous may be less appealing if the income is unstable or the price decline reflects real deterioration.
The Bottom Line
Yield is a percentage measure of income relative to price or value. It is useful, but only when investors understand which yield calculation is being quoted and what risks are attached to the income.