Many different measures exist to determine the return an investor has received on a particular investment. Actual yield is one such measure, defined by the team at the Corporate Finance Institute (CFI) as an income-only return on one of your investments. Yield excludes capital gains, which is the amount by which a given investment increases in value over time.
Types of Yield
The type of yield you're likely to calculate will vary depending on the kind of investment you're looking at. According to the team at U.S. News and World Report, annual income on stocks comes in the form of dividends, which is a portion of the company's profits that are paid out to shareholders. Dividends may be paid in cash or as additional shares in the company. Companies commonly pay out dividends quarterly, though they may also pay dividends yearly, twice-yearly or monthly.
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The yield on bonds, by contrast, comes in the form of interest. Interest accrues at a predictable rate agreed upon by the investor at the bond's issuance. The investor receives semi-annual coupon payments at a given interest rate that will not change over the life of the bond. The writers for FINRA note that two basic types of yield on bonds are the coupon yield, in which interest payments are calculated as a percentage of the bond's value at the time of issuance, and the current yield, which takes into account the current market price of the bond.
Finally, the yield on rental properties expresses the percentage of return an investor will earn through rent on a given property after operating expenses are accounted for. This type of yield is also known as the capitalization rate, or cap rate.
How to Find Actual Yield
The basic formula for determining yield is to divide the income on an investment by the value or cost of that investment to get a percentage rate. According to CFI, the average yield for S&P 500 stocks is between 2 and 4 percent annually. There are three common types of investment for which one can explore the formula for calculating the yield on every kind of investment.
Dividend yield on stocks can be calculated by finding the annual dividend (multiplying the quarterly dividend by four), then dividing that amount by the stock's share price. This number is then multiplied by 100 to get the yield rate. If a stock pays $0.50 of dividends on a quarterly basis, or $2 annually, and the stock's current share price is $200, the dividend yield on the stock is 1 percent.
Finding Bond Yields
To find the coupon yield of a bond, divide the annual coupon payment by the bond's purchase price, then multiply by 100 to get the coupon yield. If the bond has a coupon of 5 percent and cost the investor $120, the annual coupon payment is $5. The coupon yield is therefore 4.17 percent.
If the bond's market price goes up to $150, the coupon yield on the bond remains the same, but the current yield will change. The current yield is figured by dividing the annual coupon payment by the bond's current market price. For the bond whose price has increased to $150, the current yield is now 3.33 percent.
Finally, to determine rental income yield, find the net annual income on the property, then divide that number by the property's purchase price. If a given rental property cost $250,000 at the time of purchase, costs the owner $200 per month and rents out for $1,000 per month, the net annual income is $9,600. The rental income yield, or capitalization rate, is 3.84 percent.
Consider also: Bond Yields Vs. Stock Yields