Yield is the annual return on interest or dividend income. If you receive interest, dividends, or some other regular payment for your investment, you may want to calculate the yield in order to see if you are getting a good return on your investment compared to the other options available to you. Some yield calculations include the effect of compounding; others report simple interest.
First, find the principal of your investment. This is the amount of money you currently have invested in a particular item, such as a stock, bond, or property.
Determine how much you receive in payments from the investment over a certain period. For this example, let's figure out the annual yield on a stock that pays a quarterly dividend of ten cents a share.
Calculate your annual interest or dividend income. Suppose you bought 100 shares of stock at $10 a share. If we ignore commissions, that makes a total investment of $1,000. The quarterly dividend of 10 cents a share would earn you $10 (0.10 X 100) after three months. Multiply that by 4 to discover that you receive $40 in a year.
Divide the yearly income of $40 by the principal of $1,000 to get a decimal of .04. Multiply that decimal by 100 to find your yield, which is 4 percent in this case.
If an investment price goes up, the yield will go down as long as the dividend doesn't change. If the price goes down, the yield goes up as long as the dividend remains unchanged. This means your potential yield can fluctuate if the interest or dividend payments change. Dividends and floating-rate bonds are subject to changing yields. When pricing a stock or bond for purchase, figuring the yield will help you determine the attractiveness of the investment.
Don't confuse simple annual yield with yield-to-maturity, which includes the effect of reinvesting interest at the bond's interest rate. Yield-to-maturity has more meaning if you plan to hold the bond to maturity and if you can reinvest the dividends at a rate similar to that provided by the original bond.
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