What is Yield?
Yield measures the income generated by an investment relative to its price. A stock trading at $100 that pays $3 in annual dividends has a 3% dividend yield. A bond purchased at $950 with a $50 annual coupon has a current yield of 5.26%. Yield is one of the most fundamental metrics for income-focused investors.
Types of Yield
Current yield divides annual income by the current price. Yield to maturity (YTM) accounts for both coupon payments and capital gains or losses if a bond is held to maturity. SEC yield standardizes mutual fund yield calculations over a 30-day period. Each measure serves a different analytical purpose.
Key Considerations
High yield often signals higher risk. A bond yielding 8% when similar bonds yield 4% likely carries significant credit risk. Chasing yield without understanding the underlying risk is one of the most common investor mistakes. Always compare yield relative to a risk-free benchmark like Treasury rates.