Yield

Income return on an investment, expressed as a percentage.

Yield is the income return generated by an investment over a specific period, expressed as an annual percentage of the investment's cost or current market value. Unlike capital gains, which represent the change in the price of an asset, yield focuses strictly on the cash flow returned to the investor, such as dividends from stocks or interest payments from bonds. To calculate yield, you divide the annual income generated by the asset by either its purchase price (known as yield on cost) or its current market price (known as current yield). Because asset prices constantly fluctuate in the public markets, the current yield of an investment moves in the opposite direction of its price. When an asset's price falls, its yield rises, assuming the income payment remains constant. Investors care about yield because it provides a standardized way to compare the income-generating potential of different assets, such as comparing a dividend-paying stock to a government bond. However, a high yield is not always a positive sign. An exceptionally high yield can indicate that the market perceives the investment as highly risky, or that a company's stock price has plummeted because its dividend is unsustainable and likely to be cut.

An investor purchases a corporate bond for $1,000 that pays $50 in interest annually. The yield is calculated as $50 / $1,000 = 0.05, or 5%. If the market price of the bond later falls to $800 while the interest payment remains $50, the current yield rises to $50 / $800 = 0.0625, or 6.25%.