Before knowing how to calculate yield, we must first be clear about what yield is. Yield is when a person refers to earnings that were generated and realized on an investment over a certain period of time. It’s expressed in a percentage. The percentage is arrived at based on the current market value and the amount invested or the face value of the investment security.
Yield leaves out capital gains but includes interest earned as well as dividends received from holding a security for a certain period of time. The valuation, whether or not fixed, means that yields can be classified as known or anticipated.
Companies, as well as investors, use yield as a large part of their decision making. Yield is a ratio that defines how much a company pays in interest or dividends to investors every year.
Here’s how yield is calculated
Yield is calculated by dividing the interest or dividends received during a period by the amount invested in the beginning or by the price it sits at currently. Yield is usually calculated annually. However, quarterly and monthly returns are sometimes reported too.
The yield on cost can be found out by taking the annual dividend paid and dividing it by the price of the purchase.
If an investor has put $100 into a stock which paid $1 as an annual dividend. The yield on cost calculation would appear like this.
$1/$100 = 0.01 = 1%
If the investment returned $10 in the year. The calculation for the current yield would appear like this.
$1/$110 = 0.009 = 0.91%
If a stock price goes up and the dividend remains the same, the yield will be lower than when the stock was originally bought. This means that yield reacts inversely to stock prices.
You must remember that yield isn’t total return. The total return is a much more accurate measure of return on investment which brings in interest, dividends, and other capital gains.