Table of Contents
While “return” refers to a security’s gain or loss in value, the yield is what a security such as a stock or bond pays investors over time, expressed as a percentage.
Yield is typically calculated by taking the dividend, coupon, or net income earned, dividing that amount by the value of the investment, then calculating the result as a percentage.
While both yield and return are measures of performance, yield is a way to track how much income was earned over a set period, relative to the initial cost of the investment or the market value of the asset. While all investments have some kind of rate of return, not all investments have a yield, because not all investments produce interest or dividends.
Key Points
• Yield is defined as the income a security pays the investor relative to its value, expressed as a percentage, which is only a portion of the total return.
• The basic yield formula involves dividing the net realized income (dividend, coupon, or net income) by the investment’s principal or value.
• Yield-generating investments span a range of risk profiles, from low-risk cash equivalents and fixed-income securities to higher-risk equities and real estate.
• When calculating yield, investors can use cost yield (based on the original purchase price) or current yield (based on the asset’s current market price).
• Key types of yield include the dividend yield for stocks, the yield-to-maturity for bonds, and the annual percentage yield (APY) for bank accounts.
What Does Yield Mean in Finance?
Yield refers to the income the security pays the investor relative to its value, expressed as a percentage. Understanding what yield means is important for investors because it’s a useful performance metric, and it’s considered part of the overall return, whether you’re trading stocks, buying bonds or purchasing other investments.
Yield-generating investments fall into a few basic categories, which range from lower-risk investments to higher-risk types of securities:
• Cash equivalents. These can include high-yield savings accounts as well as certificates of deposit (CDs) and money market funds. Because the yield from cash equivalents is guaranteed, these are considered low risk and they have commensurately low yields.
• Fixed-income securities. The bond market includes a range of fixed-income options (e.g., from corporate bonds to municipal bonds to US Treasurys). And these pay a fixed rate of interest, which provides predictable income. As such bonds are considered low to moderate risk investments.
• Equities. Although stocks can be more volatile and are considered higher risk, some stocks pay dividends — a portion of earnings or profits — at a rate that may be appealing to investors, whether they’re investing online or through a regular brokerage.
• Real estate. Generally considered a type of alternative investments, real estate yields generally don’t move in sync with conventional stock and bond markets, and as such can provide diversification. That said, like most alternative investments, real estate can be high risk and illiquid.
It’s also possible for investors to purchase certain types of exchange-traded funds (ETFs) and mutual funds that include yield-paying securities (e.g., bond funds).
Recommended: Stock Market Basics for Beginners
How Do You Calculate Yield (Formula)?
Yield is typically calculated annually, but it can also be calculated quarterly or monthly.
Basic Yield Formula
Yield is calculated as the net realized income divided by the principal invested amount. Another way to think about yield is as the investment’s annual payments divided by the cost of that investment.
Here are formulas depending on the asset:
• Stocks: Dividends Per Share/Share Price X 100%
• Bonds: Coupon/Bond Price X 100%
• Real Estate: Net Income From Rent/Real Estate Value X 100%
For example, if a $100 stock pays out a $5 dividend for the year, then the yield for that year is 5 ÷ 100 X 100%, or a 5% yield.
Cost Yield vs. Current Yield
One important thing to think about when doing yield calculations is whether you’re looking at the original price of the stock or the current market price. (That can also be referred to as the current market value or face value.)
For example, in the above example, you have a $100 stock that pays a $5 dividend per share. If you divide that by the original purchase price, then you have a 5% yield. This is also known as the cost yield, because it’s based on the cost of the original investment.
However, if that $100 stock has gone up in price to $120, but still pays a $5 dividend, then if someone bought the stock right now at $120, it would be a 2.4% yield, because it’s based on the current price of the stock. That’s also known as the current yield.
Yield vs Return: What’s the Difference?
Calculating rate of return, by comparison, is done differently. Yield is simply a portion of the total return.
For example, if that same $100 stock has risen in market price to $120, then the return includes the change in stock price and the paid out dividend: [(120-100) + 5] ÷ 100, so 0.25, or a 25% total return.
The reason this matters is because the rate of return can change if the stock price changes, but often the yield on an investment is established in advance and generally doesn’t fluctuate too much.
Types of Yield in Investing
Given the size and scope of the US stock market, it’s not surprising that investors interested in yield-producing investments have several options.
Dividend Yield in Stocks
When you make money on stocks it often comes in two forms: as a dividend and/or as an increase in the stock price. If a stock pays out a dividend in cash to stockholders, the annual amount of those payments can be expressed as a percentage of the value of the security. This is the yield.
To better understand what a dividend is, many stocks actually pay out dividends quarterly. In order to calculate the annual yield, simply add up all the dividends paid out for the year and then do the calculation. If a stock doesn’t pay a dividend, then it doesn’t have a dividend yield.
Note that real estate investment trusts (REITs) are required to pay out 90% of their taxable income to existing shareholders in order to maintain their status as a pass-through entity. That means the yield on REITs is typically higher than for other stocks, which is one of the pros for REIT investing.
Sometimes investors also calculate a stock’s earnings yield, which is the earnings over a year, dividend by the share price. It’s one method an investor may use to try to value a stock.
Yield-to-Maturity in Bonds
When it comes to bonds vs. stocks, the yield on a bond is the interest paid — which is typically stated on the bond itself. Bond interest payments are usually determined at the beginning of the bond’s life and remain constant until that bond matures.
However, if you buy a bond on the secondary market, then the yield might be different than the stated interest rate because the price you paid for the bond was different from the original price.
For bonds, yield is calculated by dividing the yearly interest payments by the payment value of the bond. For example, a $1,000 bond that pays $50 interest has a yield of 5%. This is the nominal yield. Yield-to-maturity calculates the average return for the bond if you hold it until it matures based on your purchase price.
Some bonds have variable interest rates, which means the yield might change over the bond’s life. Often variable interest rates are based on the set U.S. Treasury yield.
APY in Bank Accounts
The definition of APY, which refers to annual percentage yield, shows the total compound interest that certain types of accounts, such as a high-yield savings account or a CD, earn in one year, expressed as a percentage.
An APY includes the effect of compound interest, which is when you earn interest on the principal as well as on the interest as it accrues. Because you can earn more interest with more frequent compounding (e.g., monthly vs. yearly), it’s important for investors who are considering different types of cash equivalents to examine the APY.
The Takeaway
A high yield investment generally means more cash flow, which can add to your returns. But a yield that is too high isn’t necessarily a good thing. It could mean the market value of the investment is going down or that dividends being paid out are too high in light of the company’s earnings.
Of course, yield isn’t the only thing you’re looking for in your investments. You may want to consider other aspects of the stocks you’re choosing: the history of the company’s growth and dividends paid out, potential for future growth or profit, the ratio of profit to dividend paid out. You may also want a diversified portfolio made up of different kinds of assets to balance return and risk.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest®. You can trade stocks, ETFs, or options through self-directed investing with SoFi Securities, or simply automate your investments with a robo advisor from SoFi Wealth. You'll gain access to alternative investments and upcoming IPOs, and can plan for retirement with a tax-advantaged IRA. With SoFi, you can manage all your investments, all in one place.
FAQ
What is a good yield for an investment?
Different securities offer different yield amounts, with lower-risk investments generally providing lower yields (and higher-risk investments potentially offering higher yields). Investors need to become familiar with the yield range of, say, cash equivalents vs. stocks and stocks vs. bonds before choosing an investment.
Why do bond yields fluctuate?
A bond’s price moves in the opposite direction of its yield. So when the bond price rises, the yield drops. When the bond price drops, the yield rises.
Can investment yields be negative?
Yes, yields on bonds, real estate, and even stocks can be negative under the right conditions.
Is yield the same as profit?
No. Although an investor’s profit can include yield, yield actually refers to the payout from certain types of investments over time, relative to the market value of the security.
Are high-yield investments risky?
Yes, generally speaking, the higher the yield the higher the risk.
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
Before investing, carefully consider the investment objectives, risks, charges, and expenses detailed in a Fund’s prospectus. This document contains important information and must be read carefully prior to investing; you can find the current prospectus by clicking the link on the Fund’s respective page.
Alternative investments are highly risky and may not be suitable for all investors. These investments often involve leveraging, speculative practices, and the potential for complete loss of investment. They typically charge high fees, lack diversification, and can be highly illiquid and volatile. Be aware that both registered and unregistered alternative investments, including Interval Funds, are not subject to the same regulatory requirements as mutual funds, and their illiquid nature may restrict your ability to trade on your timeline. Always review the specific fee schedule for Interval Funds within their prospectus.
Exchange Traded Funds (ETFs): Before investing in Exchange Traded Funds (ETF), always read the fund's prospectus. It contains important information about the fund’s objectives, risks, and fees. You can get a prospectus from the fund company’s website or by emailing our customer service at [email protected].
Mutual Funds (MFs): Investors should read and carefully consider the information contained in the prospectus, which contains the Mutual Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or SoFi's customer service at: 1.855.456.7634. Mutual Funds must be bought and sold at NAV (Net Asset Value); unless otherwise noted in the prospectus, trades are only done once per day after the markets close. Investment returns are subject to risks. Shares may be worth more or less their original value when redeemed. The diversification of a mutual fund will not protect against loss. A mutual fund may not achieve its stated investment objective. Rebalancing and other activities within the fund may have tax implications.
Investment Risk: Diversification can help reduce some investment risk, but cannot guarantee profit nor fully protect in a down market.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Options involve substantial risk of loss and the possibility an investor may lose the entire amount invested. Before starting options trading, investors should be familiar with the Characteristics and Risks of Standardized Options . TTax implications with options should be considered. Consult your tax advisor to understand any impacts to your taxes.
SOIN-Q226-013