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What is yield?


Yield is the annual return from the fixed payments made on an investment, such as interest on a bond or dividends on a stock. If a $1,000 bond pays $40 a year in interest, its yield is 40/1,000, or 4 percent. It gets a bit more complicated with stocks. If you buy a stock for $20 a share and it pays a $1 annual dividend, the yield is 1/20, or 5 percent. If someone buys the stock after it has risen to $25, then that new shareholder receives a yield of just 4 percent because the calculation is 1/25.
That assumes that the dividend hasn’t changed, but companies often raise their dividends and on rare occasions cut them. If the company that you bought at $20 raises its dividend from $1 to $1.25 by the time the new shareholder comes in, the annual yield will be the same 5 percent (1.25/25) for him as it was when you bought, but because you got in at $20, the yield for you would have risen to a healthy 6.25 percent.
Another factor to take into account is the impact of inflation. If inflation is rising at 2 percent a year and you hold a bond with a 4 percent yield, that annual interest payment only gives you a 2 percent increase in purchasing power out there in the real world. That’s why the inflation-adjusted yield on an investment is known as the “real yield.” The real yield is usually the figure that economists and financial advisers look at when calculating the worth of an investment.
-Conrad de Aenlle