RiskPicksWhat is Yield?
Yield is the income generated by an investment expressed as a percentage of its price. For stocks, yield almost always refers to dividend yield: the annual dividend payment divided by the current stock price.
How to calculate dividend yield
Dividend Yield = (Annual Dividend per Share / Stock Price) x 100
Example: a stock at $50 paying $2 per year in dividends has a yield of 4%.
Types of yield
- Dividend yield: annual dividends divided by stock price. The most common usage in stock trading
- Bond yield: the annual interest payment divided by the bond price. Often referenced in market analysis (e.g. "the 10-year Treasury yield")
- Earnings yield: the inverse of the P/E ratio (earnings per share divided by stock price). Used to compare stocks to bonds
Why traders watch yield
- High yield stocks: a yield above 4-5% may indicate the stock price has dropped significantly (which can be a warning sign) or that the company is very profitable
- Treasury yields: rising bond yields compete with stocks for investor money. When Treasury yields spike, it often puts pressure on stock prices, especially growth stocks
- Yield curve: the relationship between short term and long term Treasury yields. An inverted yield curve (short term yields higher than long term) has preceded every US recession since 1970
When financial news says "yields are rising," they usually mean Treasury bond yields, not stock dividends. This matters because rising bond yields tend to pull money out of stocks.