Yield

Key Takeaways

Yield measures the income as a percentage of the security price or the face value of an asset for a period of time

Yield is a subset of total return

A higher value of yield represents that an investment renders greater amounts of cash flows

What is Yield?

Yield measures the income as a percentage of the security price or the face value of an asset for a period of time, which is often for a year (annual or yearly). It refers to the cash flow on an investment that investors avail in the form of dividends or interest. It is calculated using the invested amount, its face value and time period for which it was invested. It should be noted that yield does not measure capital gains Yield can be classified as known or anticipated based on whether interest rates are floating or fixed.

How to calculate Yield?

Yield is the cashflow that a person gets on the investment and is usually calculated annually. The formula to calculate yield is:

Yield = Annual Income (or Net Realised Return)/Principal Amount

Example

A stock (the security here) was bought for a spot price of Rs 300 a share, with company-paid dividend worth Rs 15 on each share. Its price increased by Rs 10, i.e. each share now costs Rs 310.

The yield of the shareholder would then be 8.33 percent [{(15+10)/300} *100].

What does Yield represent?

A higher value of yield represents that an investment renders greater amounts of cash flows. Higher value of yield generally indicates higher income and lower risk. But one must make sure to understand the reason behind unusually higher yields as it may rise from the falling value of the financial instrument. As the value of the security falls, it decreases the denominator in the above-mentioned formula which in turn causes yield to increase.

Usually, investors investing in stocks prefer to have dividend payments. But at the same time, one must keep a watch on value of yield. If it increases too much, that can be an indication of fall in the stock price or it may also mean that the company is giving higher dividends. Increase in dividend pay-out is usually a good sign as it may indicate that earnings of the company are increasing leading to increase in the stock prices.

Difference between Yield and Return

Yield and return are not the same. Return is a more inclusive term measuring return on investment which takes into account capital gains in addition to interest and dividends. Yield is a subset of total return. Return denotes the profit or loss made on an investment over a period of time and as is represented in percentage.