What is Yield?
This term is used to describe the amount of money that has been earned and realized over a certain period of time. It is expressed as a percent based on either the amount invested, the current market value or the face value of the securities.
Yield is the amount of interest or dividends that you receive from holding security. They can be classified as either known or expected, depending on whether the security is valued at a fixed rate or fluctuating.
Formula for Yield
The yield is the cash flow an investor receives on his investment in a particular security. It is usually calculated on an annual basis. However, other variations such as quarterly and monthly are also used. It is important to note that it should not be mistaken for Total Return. This measure provides a comprehensive view of the return on investment.
Yield = Net Realized Profit / Principal Amount
What It Tells You
A higher value can be interpreted as a sign of a lower risk or higher income. It is important to know the calculations. The high yield could be due to a declining market value, which reduces the value of the denominator used in the formula. This increases the calculated amount even though the value is on the decline.
Although many investors are more interested in dividends, it’s also important to pay attention to yields. If they are too high, this may be an indication that the stock is falling or the company pays high dividends.
Dividends are paid out of the company earnings. Therefore, a higher dividend payout could indicate that the company is earning more, and this could lead to a higher stock price. A consistent or marginal increase in yield should be expected when higher dividends are combined with rising stock prices. A significant increase without an increase in stock price could mean that the company pays dividends while not increasing earnings. This may indicate that there are cash flow issues in the near future.
How It Is Calculated
Divide the net realized return of a security by its principal amount to calculate it. There are several ways to calculate a security’s yield, depending on its type. Dividends and price increases are added to the price of a stock, then divided by its purchase price, which is how stocks calculate their yield.
Bond yields can be analyzed as cost yield or current return. Cost yield measures returns as a percent of the initial price of a bond. Current yield measures returns in relation to the current price.
