What is Yield?

Yield? Return? What does it all mean? And do investors really need to worry about it?

One of the most challenging things for new (and even experienced) investors is trying to make sense out of all the terms. It can feel almost like trying to learn a new language. But like a new language, you don’t have to learn everything at once, and some basic phrases will give you what you need to get by until you learn more.

For instance, you need to know what stocks are if you are going to invest. That would be the language equivalent of asking someone in Paris if they speak English (Parlez-vous anglais?). The next step would be terms like return and yield. In our language example, that might be similar to asking for a coffee (Bonjour. Un café, s’il vous plaît). But what is yield? And how is it different than return?

Yield is calculated on a monthly, quarterly, or annual basis and is the return of an investment divided by the initial purchase price. Return, on the other hand, is the monetary gain you make on an investment. So if you buy a stock for $20 and sell it for $25, your return is $5.

That’s the basic definition, and naturally, there’s a lot more to it if you want to go in depth. For example, we write a lot about dividend yield. Plainly speaking, dividend yield is how much a company pays its shareholders over the course of a year of ownership, divided by its current stock price.

A dividend is a sum of money a company pays to its shareholders, typically on a quarterly basis. The higher the dividend payment, the higher the yield, which is calculated by the total annual dividend payout per share by the current stock price. So, if a company pays $2.00 per share per year, and has a stock price of $60.00, it has a yield of 3.3%. And any yield above 3% is considered good.

When you buy a dividend stock, you’ll receive a steady stream of income—generally on a quarterly basis. If the market crashes and the share price begins to fall, the nice 3% or 4% yield (or higher) will soften the blow.

U.S. Treasury bonds also offer a yield which is tied to the interest rate. Bonds are low-risk, as far as investments go, but there’s a caveat: when interest rates are rising, bond prices fall. Treasury bonds have two moving parts: the price and the yield. Presumably, an investor can buy a $10,000 U.S. Treasury bond and lock in an interest rate (which has been under 2% for most of the last 10 years). Once you buy that $10,000 bond, the price changes a little bit every day, but it’s guaranteed to be worth $10,000 upon maturity.

To really learn the basics of investing, and find out more about return, yield, and how to make smart investing decisions, download your FREE copy of our report, How to Invest in Stocks and Other Investing Basics, today.

 

 

 

 

Higher yields come with higher risks though. Many of these stocks’ yields are so high because they’re struggling, and they may even have to slash their dividends soon.