What Are the Different Types of Yield?
Current yield divides annual income by the current price. Yield to maturity (YTM) for bonds accounts for current price, coupon payments, and return of principal at maturity. Dividend yield divides annual dividends by stock price. SEC yield for funds standardizes 30-day income after expenses. Each measure captures a different dimension of income return. YTM is the most comprehensive measure for bond investors.
Why Does Yield Change When Price Changes?
Yield and price are inversely related for fixed-income investments like bonds. If you buy a $1,000 bond paying $50 per year, the yield is 5%. If the bond's market price falls to $900, someone buying it now earns the same $50 on a smaller investment — a higher yield of 5.6%. This is why rising interest rates cause bond yields to rise and bond prices to fall simultaneously.
What Is the Difference Between Yield and Return?
Yield measures only the income component of an investment. Total return includes both income (yield) and price appreciation or depreciation. A bond with a 4% yield could have a negative total return if its price falls due to rising interest rates. A dividend stock with a 3% yield could deliver a 15% total return if the stock price also rises 12%. Evaluating both yield and total return provides a complete investment picture.
Frequently asked questions
Is a higher yield always better?
Not always. An unusually high yield can signal elevated risk. A company paying an unsustainable dividend may cut it, causing the stock to fall sharply. Bonds with very high yields are typically junk-rated with significant default risk. It's important to consider why a yield is high before chasing income — it often reflects the market pricing in additional risk.
What is yield on cost?
Yield on cost measures the dividend yield relative to your original purchase price rather than the current price. If you bought a stock at $20 per share and it now pays $2 annually, your yield on cost is 10% even if the current yield based on today's price of $50 is only 4%. It illustrates the growing income stream long-term dividend investors receive.